2010 (6) TMI 778 - AT - Income Tax

Summary

Issues Involved:
1. Nature of expenditure incurred (revenue vs. capital).
2. Treatment of subsidy received from the Government of Andhra Pradesh.
3. Applicability of the Supreme Court decision in Sahney Steel & Press Works Ltd. v. CIT.

Issue-wise Detailed Analysis:

1. Nature of Expenditure Incurred:
The primary issue revolves around whether the expenditure of Rs. 7.83 crores incurred by the assessee for rectification and improvement of damaged power lines should be classified as revenue expenditure or capital expenditure. The assessee argued that the expenditure was for current repairs and thus should be treated as revenue expenditure. The Assessing Officer (AO) disallowed this claim, treating the entire amount as capital expenditure since it was funded by a capital subsidy from the Government of Andhra Pradesh. However, the Commissioner of Income-tax (Appeals) [CIT(A)] sided with the assessee, holding that the expenditure was indeed for current repairs and should be allowed as revenue expenditure. The Tribunal, after considering the rival submissions, upheld the CIT(A)'s decision, stating that the nature of the expenditure should be determined by its purpose, not the source of the funds. The Tribunal concluded that the expenditure was for current repairs, thus qualifying as revenue expenditure.

2. Treatment of Subsidy Received:
The second issue concerns the nature of the Rs. 8.50 crores subsidy received from the Government of Andhra Pradesh. The AO treated the subsidy as a capital receipt, while the CIT(A) did not explicitly address this aspect. The Accountant Member of the Tribunal raised the question of whether the subsidy should be considered as revenue receipt, invoking the Supreme Court's decision in Sahney Steel & Press Works Ltd. v. CIT, which held that subsidies given to assist in carrying out business operations should be treated as revenue receipts. The Tribunal, after considering the arguments, agreed that the subsidy was intended to assist the assessee in its business operations and thus should be treated as revenue receipt.

3. Applicability of the Supreme Court Decision:
The Tribunal also addressed the applicability of the Supreme Court decision in Sahney Steel & Press Works Ltd. v. CIT. The Accountant Member argued that this decision was relevant and should be considered. The Supreme Court had held that subsidies given to assist in carrying out business operations are revenue receipts. The Tribunal concurred, noting that the subsidy in question was given to help the assessee rectify and improve power lines damaged by a cyclone, which is an operational activity. Therefore, the subsidy should be treated as revenue receipt, aligning with the Supreme Court's ruling.

Separate Judgments Delivered:
The Tribunal's initial decision was split, with the Vice-President and the Accountant Member differing on the treatment of the subsidy. The Vice-President treated the subsidy as capital receipt, while the Accountant Member considered it as revenue receipt. This difference was resolved by the Third Member, who concurred with the Accountant Member, holding that the subsidy was a revenue receipt.

Conclusion:
The Tribunal ultimately held that the expenditure of Rs. 7.83 crores was revenue in nature and should be allowed as such. Additionally, the Rs. 8.50 crores subsidy received from the Government of Andhra Pradesh was to be treated as revenue receipt, following the Supreme Court's decision in Sahney Steel & Press Works Ltd. v. CIT. Consequently, the revenue's appeal was partly allowed, with the subsidy being taxable as revenue receipt.