2011 (4) TMI 866 - HC - Income Tax

Subsidy receivable on sale of text books - whether amount not received either by the end of the final year or till date could be brought to tax as income - assessee is an instrumentality of the State Government, and a government company within the meaning of section 617 of the Companies Act - Held that - The admitted position is that the gross receipts of the assessee exceeds Rs. one crore. Applicability of section 10(23C)(iiiad) to the present case is obviated because the provision is applicable to those educational institutions with turn-over upto Rs. one crore. The gross receipts of the present assessee exceeds Rs. one crore and cannot, therefore, be within the mischief of section 10(23C)(iiiad) of the Act. In pursuit of its charitable purpose, it registers some income in its balance-sheet will not per se make it to be a profit-making organization. An organization of this size has to maintain its infrastructure and the staff which needs money - Equally important is that the subsidy from public funds are meant to carry on the undertaker s trade and business which are trading receipts, that is, are to be brought into account in arriving at the balance of profits orgains - The judgment of the Supreme Court in Assam State Text Book Production and Publication Corporation Ltd. vs. C I T 2009 (10) TMI 60 - SUPREME COURT , is particularly relevant in the present context and deals with taxability of the subsidy received by the appellant from the Assam Government - Decided in the favour of the assessee

Issues Involved:
1. Taxability of subsidies received by the assessee from the Bihar Government.
2. Applicability of the Supreme Court judgment in Sahney Steel & Press Works Ltd. v. CIT.
3. Consideration of subsidies as taxable income under the mercantile system of accounting.
4. Exemption status of the assessee as an educational institution under the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Subsidies Received by the Assessee from the Bihar Government:
The primary issue concerns whether the subsidies received or receivable by the assessee from the Bihar Government are taxable under the provisions of the Income Tax Act, 1961. The assessee, a public sector undertaking engaged in printing and selling textbooks, claimed exemption from taxation, asserting its status as an educational institution for charitable purposes under section 2(15) of the Act. The assessing officer, however, held that the subsidies were taxable, a decision upheld by the appellate authority and the Income Tax Appellate Tribunal (ITAT). The High Court examined the nature of the subsidies, concluding that they were intended to support the assessee's charitable activities and were thus exempt under section 10(23C)(iiiab) of the Act. The court emphasized that the subsidies were meant to fulfill the constitutional mandate of promoting education among deprived sections of society and were not indicative of profit-making.

2. Applicability of the Supreme Court Judgment in Sahney Steel & Press Works Ltd. v. CIT:
The Tribunal had relied on the Supreme Court's judgment in Sahney Steel & Press Works Ltd. v. CIT, which dealt with industrial subsidies. The High Court found this reliance misplaced, as the Sahney Steel case did not address subsidies for charitable purposes or educational institutions. The court noted that the subsidies in Sahney Steel were meant to assist the business operations of the company, whereas in the present case, the subsidies were aimed at promoting education, a charitable activity under section 2(15) of the Act. Therefore, the High Court held that the Sahney Steel judgment was not applicable to the present case.

3. Consideration of Subsidies as Taxable Income under the Mercantile System of Accounting:
The Tribunal had upheld the assessment of the subsidies as taxable income under the mercantile system of accounting. However, the High Court disagreed, stating that the subsidies were not operational or trade receipts but were intended for a specific public purpose. The court referred to various judgments, including those of the House of Lords and the Supreme Court, which distinguished between subsidies for public utility purposes and those for business operations. The court concluded that the subsidies received by the assessee were not taxable as they were meant for a specific charitable purpose and not for the assessee's general business operations.

4. Exemption Status of the Assessee as an Educational Institution under the Income Tax Act:
The assessee claimed exemption under section 10(23C)(iiiab) of the Act, which exempts income received by educational institutions existing solely for educational purposes and substantially financed by the government. The High Court agreed with this claim, noting that the assessee was a government company carrying out the State Government's mandate to promote education. The court highlighted that the assessee's activities were charitable in nature and aimed at advancing education among weaker sections of society. Consequently, the court held that the assessee was entitled to exemption under section 10(23C)(iiiab).

Conclusion:
The High Court allowed the appeal, setting aside the ITAT's order and remitting the matter to the assessing officer for a fresh assessment in accordance with the law and the court's observations. The court answered the substantial questions of law in favor of the assessee, emphasizing that the subsidies received were for a charitable purpose and thus exempt from taxation. The court did not find it necessary to decide on the question of real income, leaving it open for the assessing officer to consider afresh. No order as to costs was made.

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