2009 (5) TMI 72 - HC - Income Tax

Capital receipt versus Revenue Receipt - additional quota for free sale of sugar CIT(A) found that , the very right to receive the excess price and the excess excise duty was based on the obligation to recoup the capital employed, since the amount could not have been received without that obligation, there was a clear nexus and consequently a diversion of income. Hence, from any point of view the amounts received took the nature of capital receipt by reason of the incentive scheme and thus, could not be treated as part of the assessee s income held that - main eligibility condition for the scheme was that the incentive had to be utilised for the repayment of loans taken by the assessee to set up a new unit or substantial expenses of a existing unit and subsidy receipt by the assessee was not in the course of a trade and was of capital nature ITAT order confirmed the decision of CIT(A) not interfered with.

Summary

Issues:
1. Whether the incentive received by the assessee under the Sampat scheme is a capital receipt?
2. Whether the amount of incentive received could be taxed under section 28(iv) of the Income-tax Act?

Analysis:
1. The appeal pertains to the assessment year 1994-95, where the respondent-assessee claimed that the incentive received under the scheme for recoupment of capital and repayment of loans was a capital receipt. The Assessing Officer disagreed, treating it as a revenue receipt. However, the Commissioner of Income-tax (Appeals) accepted the plea, stating that the amounts received had a clear nexus with the obligation to recoup capital employed, making it a capital receipt by reason of the incentive scheme.

2. The Revenue appealed to the Tribunal, which dismissed the appeal based on a previous order involving a similar scheme for another sugar manufacturer. The Revenue argued that the incentive was part of normal business and should be treated as a revenue receipt, not towards loan repayment. On the other hand, the respondent-assessee relied on a Supreme Court decision in CIT v. Ponni Sugars and Chemicals Ltd., where it was held that incentives for loan repayment were of capital nature.

3. The High Court, after hearing arguments from both sides, found that the incentive scheme required utilization for loan repayment, similar to the decision in Ponni Sugars case. Consequently, the court concluded that the Tribunal's order did not raise any substantial question of law. Therefore, the appeal was dismissed.

In conclusion, the High Court upheld that the incentive received by the assessee under the Sampat scheme was a capital receipt and could not be taxed under section 28(iv) of the Income-tax Act. The decision was based on the nexus between the incentive and the obligation to recoup capital, in line with the Supreme Court's ruling on similar schemes.