1957 (12) TMI 26 - HC - Income Tax

Summary

Issues Involved:
1. Whether the subsidy of Rs. 89,791/- paid by the Government of India to the assessee company during the present accounting period is liable to be assessed as income, profits, or gains of the assessee's business.
2. Whether this sum of Rs. 89,791/- is in the nature of a refund of the additional excise duty levied and paid by the assessee during the year under consideration.

Detailed Analysis:

Issue 1: Taxability of the Subsidy as Income
The court examined whether the subsidy of Rs. 89,791/- paid by the Government of India to the assessee company should be considered as income, profits, or gains of the business. The assessee, a limited company engaged in manufacturing sugar, had to pay increased wages to its workers as directed by the U.P. Government. To compensate for this additional expenditure, the Government of India decided to provide a subsidy to the sugar factories in U.P. and Bihar. The subsidy was paid at the rate of 9 annas per maund of sugar produced during the 1946-47 season.

The assessee argued that this subsidy was a casual receipt and not income arising from business, thereby claiming exemption under Section 4(3)(vii) of the Income Tax Act. The Tribunal, however, rejected this contention, stating that the subsidy was income liable to tax based on the principle laid down in the case of Pontypride and Rhondda Joint Water Board v. Ostime (H.M. Inspector of Tax), 1946-14 ITR 45 (Sup).

The court held that the nature of the receipt must be judged by considering the circumstances and the purpose for which it was given. The subsidy was paid to compensate for the loss of profits due to additional wage payments, which were business-related expenses. Consequently, the subsidy was inseparably connected with the business and arose from it. Thus, it was considered a trading receipt and included in the taxable income of the company.

Issue 2: Nature of the Subsidy as a Refund of Additional Excise Duty
The second issue was whether the subsidy could be considered a refund of the additional excise duty paid by the assessee. The court noted that there was no finding that the amount paid as excise duty was equal to or greater than the subsidy received. The circumstances indicated that the subsidy was compensation for additional wages paid, not a refund of excise duty. The mere fact that the subsidy was paid from the proceeds of the additional excise duty did not convert it into a refund of excise duty.

Conclusion:
The court answered the first question in the affirmative, holding that the subsidy was taxable as income arising from the business. The second question was deemed unnecessary to answer in light of the first conclusion, although the court incidentally noted that the subsidy could not be considered a refund of excise duty. The record was returned with the court's opinion, and costs for the reference were fixed at Rs. 250/- for the department.