2013 (9) TMI 736 - HC - Income Tax

Whether incentive received by the assessee by way of additional quota for free sale sugar which is directly connected with the business activities of the assessee, was on capital account and hence not taxable as a revenue receipt Held that - Following the judgment in the case of CIT Vs. Ponni Sugars & Chemicals Ltd 2008 (9) TMI 14 - SUPREME COURT , in which it was held that main eligibility conditions for the scheme (Sampat Incentive Scheme) was that the incentive had to be utilized for repayment of loans taken by the assessee to set up new units or substantial expansion of an existing unit, and the subsidy received by assessee was not in the course of a trade but was a capital nature In the present case, the incentive received is considered as Capital in nature Decided against the Revenue. Whether allowance made u/s 43B in respect of unpaid production incentive bonus covered under section 36 (i) (ii) of the I.T. Act Held that - The Company was claiming allowance of Rs.13,98,899/- on the unpaid productivity incentive bonus as on 31.3.1990 - Allowance is permissible on actual payment of production linked incentive bonus to the workmen of the Company, and not on the amount reserved for that purpose, which is kept as unpaid - Allowance under Section 37 of the Act in respective of productivity linked incentive bonus can be claimed as deduction, provided the assessee-company paid the amount in the previous year, relevant to the assessment year in question. The allowance cannot be claimed for unpaid part of production linked incentive bonus Decided in favor of Revenue.

Summary

Issues:
1. Taxability of incentive received by the assessee under the 'Sampat Incentive Scheme' as a revenue or capital receipt.
2. Disallowance of unpaid production incentive bonus under section 36(i)(ii) of the Income Tax Act.

Analysis:

Issue 1:
The first question revolved around the tax treatment of the incentive received by the assessee under the 'Sampat Incentive Scheme.' The Income Tax Appellate Tribunal held that the incentive was on capital account and not taxable as a revenue receipt. The assessee argued that the incentive was directly connected to business activities and should be treated as a capital receipt. The Court referred to previous judgments, including CIT Vs. Ponni Sugars & Chemicals Ltd, and held that the incentive, meant for repayment of loans for setting up new units, was of a capital nature. Therefore, the first question was decided in favor of the assessee and against the revenue.

Issue 2:
Regarding the disallowance of the unpaid production incentive bonus, the Assessing Officer added the amount to the income of the assessee under section 36(i)(ii) of the Income Tax Act. The C.I.T.(A) upheld the disallowance stating that the liability for payment had not crystallized during the relevant year. However, the Tribunal found that the bonus was productivity-linked and allowable as a deduction under Section 37 of the Act, provided it was actually paid. The Court agreed that the allowance could only be claimed for the amount paid in the previous year, not for the unpaid portion. Thus, the second question was decided in favor of the revenue and against the assessee.

In conclusion, the Court upheld the tax treatment of the incentive as a capital receipt and disallowed the deduction for the unpaid production incentive bonus. The Tribunal was directed to proceed in accordance with the law based on the Court's decision.