Receipts' classification as capital or revenue depends on the evidence of their use; lacking such proof results in taxation as revenue income.

JUDGMENT :

Suddala Chalapathi Rao, J.

1. The instant Appeal has been filed assailing the order, dt.19.06.2009, passed by the Income Tax Appellate Tribunal, Hyderabad Bench-A, Hyderabad (for short ‘the ITAT), in ITA.No.346/Hyd/2004.

2. The brief facts of the case are that, the respondent-assessee namely M/s Sanghi Textiles Limited, is an assessee on the rolls of Deputy Commissioner of Income Tax, Central Circle-I, Hyderabad (for short ‘the Assessing Authority’). The assessee entered into a Memorandum of Understanding (MoU) and a Lease Agreement, dt.01.03.1995, with the Assam Government, for taking over and developing a sick paper mill namely Ashok Paper Mills (Assam) Ltd. As part of the revival package, the assessee received Rs.4.60 Crores as promoters’ contribution from the Assam Government. In addition, the assessee received Rs.2.30 crores towards margin money for working capital and Rs.10.40 crores towards cash loss for the first two years of operation. The entire paper mill along with buildings and external facilities was handed over to the assessee for restarting and running the unit, the appellant/assessee started its operation by reviving the unit.

3. While so, the Assessing Authority passed assessment orders, dt.29.03.2000, by treating the promoters’ contribution of Rs.4.60 Crores as a revenue receipt and brought the same to tax for the assessment years 1996-97 and 1997-98.

4. Assailing the said assessment order, the respondent/assessee filed appeal before the Commissioner of Income Tax(Appeals) (for short ‘CIT(A)’) in ITA.No.2199/CC- 1/CIT(A)V(Cent.)/2000-01. The CIT(A) vide order dt.19.03.2001, deleted the addition holding that as the said amount was received for revival of a sick unit, it constitutes a capital receipt and not a revenue receipt and directed the Assessing Authority to treat the same as capital expenditure.

5. Assailing the order of the CIT(A), the appellant/Revenue filed an appeal before the learned ITAT in ITA.No.346/Hyd/2004, and the Tribunal dismissed the said appeal vide order, dt.19.06.2009, confirming the orders of the CIT(A). The said order is assailed by the Revenue in the instant appeal.

6. The appeal was admitted to consider the following substantial questions of law:

“Whether the amount of contribution received by the respondent-assessee, which is in the nature of grant/incentive and not referable to any fixed capital, is not liable to tax as revenue receipt and the order of the Tribunal treating the promoters’ contribution amount received by the respondent assessee as a capital receipt and not exigible to tax is perverse in law and contrary to the material on record?

7. We have heard Ms B.Sapna Reddy, learned Senior Standing Counsel for Income Tax Department for appellant-Revenue and Sri G.V.Ambeshwar, learned counsel representing M/s M.N. Advocates for respondent-assessee.

8. The basic contention of the learned Senior Standing Counsel for appellant/Revenue is that, there is no evidence to show that the amount of Rs.4.60 Crores was received as a loan or as a grant- in-aid earmarked for capital investment and no covenants in the MOU or the agreement showing that the said amounts should be utilized only for capital investment towards purchase of machinery or setting up of new units etc., and also no evidence was placed to show that the said amount was reduced from the cost of the assets, thereby the assessee sought for reimbursement of losses incurred during the first two years of its operation/management. Thus, the learned Senior Standing Counsel, in the backdrop of the above factual matrix, contends that the receipt of Rs.4.60 Crores paid towards running of the company is to be treated a