( 1 ) IN compliance of direction of this court on an application under Section 256 (2) of the Income-tax Act 1961, the Tribunal has referred the following question for the opinion of this court :"whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that realisation through additional free sale of sugar quota under the Sampat Incentive Scheme was in the nature of capital receipt ?"

( 2 ) AT the outset it is brought to our notice that the question is covered by the order of this court dated March 31, 1998, in the case of this assessee whereby the application of the Revenue under Section 256 (2) of the Act has been rejected. Therefore, this application could be rejected outright or the question can be answered in favour of the assessee. Learned counsel for the Revenue has not controverted this fact. The Tribunal has decided the issue in favour of the assessee on two counts firstly that incentive receipts have overriding obligation, the additional profits will only be used to pay off the loans taken from Government financial institutions, for expansion of sugar factory, in other words, the receipt on account of incentive will be used to pay off capital loan. Secondly, when the receipt is for payment of loan taken for capital asset, it is a capital receipt. The first finding of overriding obligation has not been challenged, therefore, the question regarding the second finding has become only of academic interest, so long as the finding of the Tribunal regarding diversion of income remains, the incentive receipts cannot be taxed as revenue receipt.

( 3 ) THOUGH the question is covered in favour of the assessee but when the reference has been made as per our direction on application under Section 256 (2), therefore, we would like to answer the question on the merits also. On the merits also we do not find force in the case of the Revenue.

( 4 ) AS to overcome the problem of shortage of sugar for public, the Government had introduced a Scheme in 1975, which is modified on November 15, 1980. Under the Scheme, the Government has given two incentives : first to increase the free sale of sugar quota and, secondly, a concession was given in excise duty, if there is an expansion in the existing sugar factory or new factory is set up.

( 5 ) TO have the benefit of the Scheme, the assessee has taken the loan to the tune of Rs. 243 lakhs from Government financial institutions for expansion of the factory and by expansion raised the capacity of the factory from 1,219 tons crushing per day to 1,600 tons crushing per day. The expansion in the factory has been approved by the Directorate of Sugar, Ministry of Food, Government of India, under the Scheme.

( 6 ) ON the basis of the expansion of the existing sugar factory, the assessee was held eligible for the incentive by way of release of additional free sale sugar quota, under the Incentive Scheme of the Government of India, Directorate of Sugar, dated November 15, 1980, read with the earlier Scheme dated December 6, 1975.

( 7 ) THE salient features of the Scheme under which the factory is eligible of the benefit of Scheme have been conveyed by the letter of Directorate of Sugar, dated November 15, 1980, the relevant part of which reads as under :"to mitigate the hardship caused to the sugar industry, in the establishment of new sugar factories and for effecting substantial expansions in the existing sugar factories, caused by steep rise in the cost of plant and machinery needed for such sugar projects, the Government sanctioned a Scheme in November, 1975, to provide incentives to the new sugar factories and expansion scheme. The incentives consisted partly of higher percentage of sale of sugar quota and partly of concessions in the excise duty. The scheme came into effect from November 1, 1975, and envisaged that new factories and expansion projects should, over a period of five years from the date of commencement of production/completion of

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