2013 (3) TMI 99 - HC - Income Tax

Nature of subsidy received - Capital or revenue receipt - compensation for loss of profit - held that - The Janta Cloth Scheme for the handloom sector was introduced with the twin objective of providing sustained employment to the unemployed and underemployed handloom weavers and at the same time to provide cheaper cloth to the weaker section of the population of our country. The subsidy was payable on the basis of actual deliveries of Janta Cloth. 20% of the subsidy was meant for meeting overhead expenses whereas 80% was to be utilised for meeting the cost of production. Applying the principles laid down by the Apex Court in the case of Sahney Steel & Press Works Ltd. Versus Commissioner of Income Tax,A.P.-I, Hyderabad, (1997 (9) TMI 3 - SUPREME COURT) to the facts of the present case, we find that one of the objectives of the Janta Cloth Scheme was to provide cheaper cloth to the weaker section of the population of our country. The subsidy was payable on actual deliveries made and not on the portion relating to goods returned. 20% of the subsidy was meant for meeting the overhead expenses while 80% was to be utilised for meeting the cost of production. Anything incurred towards overhead expenses and cost of production is necessarily a revenue expenditure. Therefore, amount given as subsidy to meet any revenue expenditure can safely be termed as revenue receipt. - Decided in favor of revenue.

Summary

Issues:
Interpretation of subsidy under the "Janta Cloth Scheme" as a capital or revenue receipt for the Assessment Year 1979-80 and 1980-81.

Analysis:
The case involved a State Government Undertaking receiving subsidy under the "Janta Cloth Scheme" announced by the Central Government. The subsidy was aimed at promoting the handloom industry and providing cheaper cloth to the population. The applicant argued that the subsidy was meant to provide working capital eroded due to selling cloth at lower rates, making it a capital receipt. However, the Assessing Officer considered it a revenue receipt, as it was related to actual deliveries of cloth and meant to compensate for selling at lower prices fixed by the government.

The Tribunal and the Commissioner of Income Tax (Appeals) upheld the revenue treatment of the subsidy. The applicant contended that the subsidy was linked to production and meant to avoid defeat of the government scheme due to capital erosion. The department argued that the subsidy was to meet production costs and sale prices, indicating a revenue nature. The Court analyzed the scheme's objectives, which included providing cheaper cloth and sustaining employment, and the subsidy's utilization for production costs and overhead expenses.

Referring to legal principles, the Court concluded that subsidies assisting in trade or business are trading receipts unless from a rating authority. As the subsidy under the Janta Cloth Scheme was for meeting production costs and overhead expenses, it qualified as a revenue receipt. Therefore, the subsidy represented compensation for loss of profit and was deemed a revenue receipt, affirming the Revenue's stance.

In conclusion, the Court held that the subsidy received under the Janta Cloth Scheme was a revenue receipt, answering the referred question in favor of the Revenue and against the assessee.