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1997(8) Supreme 333
SUPREME COURT OF INDIA
(From Andhra Pradesh High Court)
Suhas C. Sen & D.P. Wadhwa, JJ.
M/s. Sahney Steel & Press Works Ltd., Hyderabad etc. etc. -Appellants
versus
Commissioner of Income Tax, Andhra Pradesh-I, Hyderabad -Respondent
Civil Appeal No. 2193 of 1985
With
(C.A.Nos. 10091/95, 5279/96, 2008/88, 425/85 & 1664-65/97)
Decided on 19-9-1997
Counsel for the Parties :
For the Appearing Parties, B.B. Ahuja, Sr. Advocate, (S. Ganesh, Mrs. A.K. Verma) Advocates for M/s. JBD & Co., A.V. Rangam, A. Ranganadhan, G. Gopalakrishnan, Buddy A. Ranganadhan, S. Rajappa, B.B. Ahuja, Ms. Lakshmi Iyengar, (Arvind Kr.), Advocate for Mrs. M. Karanjawala, Advocate/Advocates.
Held; 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. (Para 13)
By no stretch of imagination can the subsidies whether by way of refund of sales tax or relief of electricity charges or water charges can be treated as an aid to 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. (Para 17)
It is not the source from which the amount is paid to the assessee which is determinative of the question whether the subsidy payments are of revenue or capital nature. The first proposition stated by Viscount Simon in Ostime s Case (supra) is that if payments in the nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are trade receipts. The sales tax upon collection forms part of the public funds of the State. If any subsidy is given, the character of the subsidy in the hands of the recipient - whether revenue or capital - will have to be determined by having regard to the purpose for which the subsidy is given. If it is given by way of assistance to the assessee in carrying on of his trade or business, it has to be treated as trading receipt. The source of the fund is quite immaterial. (Para 18)
If monies are given to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade. (Para 19)
In the case before us, subsidies have not been granted for production of or bringing into existence any new asset. The subsidies were granted year after year only after setting up of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee. Applying the test of Viscount Simon in the case of Ostime, it must be held that these subsidies are of revenue character and will have to be taxed accordingly. (Para 21)
(ii) TAXATION-Income-tax- Revenue receipt or capital receipt -Subsidy payment-Determination as to whether the payment is in the nature of capital or revenue receipt -Basic principles to be applied- Source of fund immaterial-If it is given by way of assistance to the assessee in carrying on of his trade or business-When money given to assessee only after and conditional upon commencement of production -Such subsidies must be treated as trading receipt.
JUDGMENT
Sen, J.-The question in this case is whether the subsidy received by the assessee-Company from the Andhra Pradesh Government is taxable as revenue receipt or not. It appears from the notification issued by the Andhra Pradesh Government that certain facilities and incentives were to be given to all the new industrial undertakings which commenced production on or after 1.1.1969 with investment capital (excluding working capital) not exceeding Rs. 5 Crores. The incentives were to be allowed for a period of five years from the date of commencement 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 incetives were :
"(a) Refund of sales tax on raw materials, machinery and finished goods, levied by the State Government subject to a maximum of 10 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 in the case of medium and large scale industries and 12-1/2 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 used for establishment of any industry, shall be limited to the amount of such taxes payable immediately before the land is so used;
(f) The following additional incentives will be allowed to new industrial units set up in the ayacut areas of Nagarjunasagar, Pochampad and K.C. Canal in the Ramagundam-Kothagudem areas and in the following eight backward districts:
xx xx xx xx xx"
2. The salient features of the scheme formulated by the Andhra Pradesh Government was that the incentives were not available unless and until production had commenced. The availability of the incentives would be limited to a period of five years from the date of commencement of production. The incentives were to be given by way of refund of sales tax and also by subsidy on power consumed for production to the extent stated in the notification. Exemptions were given also from payment of water rate. Refund was also provided for water rate in respect of water drawn from Government sources. There were certain additional incentives with which we are not concerned in this case.
3. The important point to note is that all the incentives are production incentives in the sense that the Company will be entitled to these incentives only after it goes into production. The scheme was not to make any payment directly or indirectly for setting up of the industries. It is only after the industries had been set up and production had been commenced that the incentives were to be given.
4. The second important thing to note is that the manner in which the incetives were given is of no consequence for datermination of the question raised in this case. Incentives were given by way of refund of sales tax on raw material, machinery and finished goods. Similarly, subsidy on power was confined to "power consumed for production". In other words, if power is consumed for any other purpose like setting up the plant and machineries, the incetives will not be given. Refund of sales tax will also be in respect of taxes levied after commencement of production and upto a period of five years from the date of commencement of production. It is difficult t
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