2008 (8) TMI 351 - HC - Income Tax

Revenue receipt or capital receipt amount received as incentive and production incentive bonus received from govt. - we are of the view that where the incentive has been given to an assessee only for expansion of the plant and machinery of the industry, run by the assessee, or for the purposes of payment of term loan received by the assessee from the Government of India or financial institutions, the amount of incentive is nothing but a capital receipt. However, if such amount received by the assessee is permissible to be used, or used in day-to-day business of the assessee, the receipts earned by the assessee by selling the additional quantity of the levy sugar as free sugar cannot be said to be capital receipt and the same is nothing but revenue receipt of the assessee. Further it is held that the production incentive bonus is deductible

Summary

Issues:
1. Whether the Income-tax Appellate Tribunal erred in holding that permitting the assessee to sell a higher percentage of levy-free sugar is not a revenue receipt?
2. Whether the Income-tax Appellate Tribunal erred in upholding the order that production incentive bonus was deductible expenditure for computing taxable income?

Detailed Analysis:
Issue 1:
The case involved a cooperative society engaged in manufacturing and selling sugar and its by-products. The Assessing Officer disallowed the deduction of production incentive bonus and added to income due to excess realization of incentive. The Commissioner of Income-tax (Appeals) set aside the disallowance and addition, which was appealed by the Revenue before the Income-tax Appellate Tribunal. The Tribunal upheld the Commissioner's decision. The court analyzed precedents where subsidies given by the government were considered taxable revenue. The appellant argued that the incentive was for loan repayment and thus a capital receipt, citing relevant case law. The Assessing Officer considered the incentive as revenue receipt, but the Commissioner held it as a capital receipt. The Tribunal agreed that if the incentive was used for expansion or loan repayment, it was a capital receipt; otherwise, it was a revenue receipt.

Issue 2:
Regarding the disallowance of production incentive bonus, the Assessing Officer's decision was set aside by the Commissioner and upheld by the Tribunal. The court referred to a previous judgment holding that production incentive bonus is deductible only when paid in the assessment year. The court discussed relevant sections of the Income-tax Act and reaffirmed the deductibility of production incentive bonus. The court maintained the decision of the Commissioner and the Tribunal on this issue.

In conclusion, the court disposed of the appeal by allowing the Assessing Officer to re-examine the incentive usage for loan repayment or plant expansion. The court upheld the decisions regarding the nature of the incentive as either capital or revenue receipt and the deductibility of production incentive bonus based on the assessment year's payment.