2003 (7) TMI 63 - HC - Income Tax

Assessee-company is engaged in the business of manufacture of asbestos sheets. The assessee-company claimed that the transport subsidy being in the nature of capital receipt should be excluded from the total income. The assessee-claimed that the transport subsidy is granted with reference to the cost of transporting raw materials and finished goods to and fro from the backward areas - The matter is remanded to the assessing authority to consider the question of subsidy in the light of the decision of the apex court in Sahney Steel and Press Works Ltd. s case

Summary

Issues Involved:
1. Whether the transport subsidy is a revenue receipt or a capital receipt and whether it is taxable.
2. Whether the expenditure incurred towards project prospecting expenses for setting up a mini cement plant is a revenue expenditure or a capital expenditure.

Detailed Analysis:

Issue 1: Transport Subsidy as Revenue or Capital Receipt

The primary issue to be determined is whether the transport subsidy received by the assessee is a revenue receipt or a capital receipt and whether it is liable to be taxed. The assessee claimed that the transport subsidy, granted to offset transportation costs to and from backward areas, should be considered a capital receipt and excluded from total income. The Assessing Officer, however, treated the subsidy as a revenue receipt and taxable since it was not exempt under any provision of the Income-tax Act, 1961.

The appellate authority and the Income-tax Appellate Tribunal (ITAT) both held that the transport subsidy does not fall within the ambit of taxable income, considering it a grant by the State to assist industrial growth, thus not a trading or revenue receipt. The Tribunal upheld the appellate authority's decision.

The High Court referred to the Supreme Court's decision in Sahney Steel and Press Works Ltd. v. CIT [1997] 228 ITR 253, which established that the nature of subsidy (capital or revenue) depends on its purpose. If the subsidy is to assist in setting up a business, it is capital; if it is to aid in business operations post-commencement, it is revenue. The High Court noted that the taxing authorities had not considered the purpose and utilization of the subsidy before determining its nature. Consequently, the High Court remanded the matter to the assessing authority to reconsider the subsidy in light of the Sahney Steel decision.

Issue 2: Nature of Project Prospecting Expenses

The second issue concerns whether the expenses incurred by the assessee for survey and feasibility reports and various technical services for setting up a mini cement plant should be treated as revenue expenditure or capital expenditure. The assessee argued that these expenses were for the purpose of running the business more efficiently, as the proposed cement plant would supply raw material to the existing asbestos sheet manufacturing unit.

The Assessing Officer considered these expenses as capital expenditure, stating that the proposed cement plant was a separate business distinct from the asbestos sheet manufacturing business. Conversely, the appellate authority and the ITAT found that both units were interconnected, under common management and funds, and therefore, the expenses should be treated as revenue in nature.

The High Court referred to the Supreme Court's rulings in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 and Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, which distinguish between capital and revenue expenditure based on the purpose and nature of the expenditure. If the expenditure is for acquiring an asset or advantage of enduring benefit, it is capital; if it is for running the business more efficiently, it is revenue.

The High Court found that the feasibility report was to determine the viability of a mini cement plant, which would supply raw material to the existing asbestos plant, thus aiming to enhance business efficiency. Since the mini cement plant did not come into existence, the expenses could not be considered capital. The High Court concluded that these expenses were for business necessity and expediency, thus revenue in nature, and deductible.

Conclusion:

The High Court remanded the case to the assessing authority to reconsider the nature of the transport subsidy in light of the Supreme Court's decision in Sahney Steel and Press Works Ltd. For the project prospecting expenses, the High Court affirmed that these should be treated as revenue expenditure and deductible, given their purpose to enhance the business efficiency of the existing asbestos sheet manufacturing unit.