1981 (1) TMI 143 - AT - Income Tax

Issues Involved:

1. Whether the amount of Rs. 14,665 received by the assessee as a subsidy from the Government of Andhra Pradesh is a capital receipt or a revenue receipt.
2. Whether the provisions of Section 41(1) of the Income-tax Act, 1961 are applicable to the subsidy received.
3. Whether the subsidy received falls within the purview of Section 28(iv) of the Income-tax Act, 1961.
4. The applicability and binding nature of Circular No. 142, dated 1-8-1974, issued by the Central Board of Direct Taxes (CBDT).

Detailed Analysis:

1. Nature of the Subsidy: Capital Receipt vs. Revenue Receipt

The assessee, a limited company, received a subsidy of Rs. 14,665 from the Government of Andhra Pradesh, which was included in its total income for the assessment year 1974-75. The assessee contended that this subsidy was a capital grant and not part of business income, thus not exigible to tax. The subsidy was granted under G.O. Ms. No. 1225 dated 31-12-1968 and G.O. Ms. No. 455 dated 3-5-1971, aimed to stimulate rapid industrialization and private sector investment in the state. The subsidy was quantified with reference to sales tax paid but was intended as a development grant for setting up new industries. The Tribunal concluded that the subsidy was a capital receipt, emphasizing that the Government's objective was to incentivize the setting up of new industries, which is a capital expenditure. The Tribunal also noted that the subsidy was to be used for development purposes, and misuse could lead to its recovery, reinforcing its capital nature.

2. Applicability of Section 41(1) of the Income-tax Act, 1961

The Commissioner (Appeals) upheld the inclusion of the subsidy in the total income under Section 41(1), which deals with the remission or cessation of trading liabilities. The Tribunal, however, found that the provisions of Section 41(1) were not applicable. It reasoned that the subsidy was not a refund of sales tax but a development grant linked to capital outlay. Even if considered a refund, the subsidy related to the purchase of machinery (Rs. 5,839) would not attract Section 41(1) as it was on capital account and not allowed as a deduction in earlier years. The Tribunal concluded that the subsidy did not represent a remission or cessation of liability or deduction previously allowed, thus Section 41(1) was not applicable.

3. Applicability of Section 28(iv) of the Income-tax Act, 1961

The learned departmental representative argued that the subsidy could be taxed under Section 28(iv), which includes the value of any benefit or perquisite arising from business. The Tribunal rejected this argument, stating that the subsidy was received for setting up the business and not from carrying on the business. It held that the subsidy was a capital receipt and not a benefit arising from business operations. Additionally, even if considered a benefit, Section 28(iv) would not apply as the subsidy was a cash grant, and the provision pertains to benefits not convertible into money.

4. Binding Nature of CBDT Circular No. 142, dated 1-8-1974

The assessee relied on CBDT Circular No. 142, which classified subsidies given for helping the growth of industries as capital receipts. The Tribunal noted that the circular was in force on the date of assessment and was binding on the tax authorities. The Tribunal found that the conditions mentioned in the circular were satisfied in the present case, as the subsidy was given for industrial growth, determined with reference to fixed capital, excluded working capital, and required the unit to remain in production for at least five years. The Tribunal concluded that the subsidy in question was capital in nature, consistent with the circular.

Conclusion:

The Tribunal allowed the appeal in part, holding that the subsidy of Rs. 14,665 received by the assessee was a capital receipt and not includible in the total income. The provisions of Section 41(1) and Section 28(iv) were not applicable to the subsidy. The CBDT Circular No. 142 was binding and supported the conclusion that the subsidy was a capital receipt.

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