2009 (7) TMI 737 - HC - Income Tax

Revenue or Capital receipt - Whether on the facts and in the circumstances of the case the Tribunal was legally justified in deleting the addition on account of addition of incentive realized on additional free sugar sale treating revenue receipt made by the Assessing Officer and confirmed by the Commissioner of Income tax (Appeals) Bareilly? Held that - in the decision of CIT v. Ponni Sugars and Chemicals Ltd the Supreme Court held that main eligibility condition for the scheme was that the incentive had to be utilized for the repayment of loans taken by the assessee to set up new units or substantial expansion of an existing unit and that the subsidy received by the assessee was not in the course of trade. It was a capital receipt.

Summary

Issues:
Interpretation of revenue receipt vs. capital receipt under the Income-tax Act, 1961 for incentive received by a sugar manufacturing business.

Analysis:
The case involved an appeal under section 260A of the Income-tax Act, 1961, regarding the treatment of an incentive received by a sugar manufacturing business during the assessment year 1996-97. The primary question was whether the incentive amounting to Rs. 3,71,78,906 should be considered a capital receipt or a revenue receipt.

Before the Assessing Officer, the respondent-assessee argued that the incentive was a capital receipt under a scheme by the Central Government for recoupment of capital employed and loan repayment for setting up a new sugar factory/expansion. However, the Assessing Officer disagreed and treated it as a revenue receipt. The Commissioner of Income-tax (Appeals) in Lucknow accepted the assessee's plea on appeal.

The Revenue challenged the decision before the Tribunal, which dismissed the appeal based on a previous order in a similar case involving another sugar manufacturing business under the same scheme.

During the hearing, the Revenue argued that the incentive was a revenue receipt as it was part of the normal course of business, not related to loan repayment for setting up a sugar factory. In contrast, the respondent-assessee's counsel cited a Supreme Court decision in CIT v. Ponni Sugars and Chemicals Ltd., where it was held that incentives under a similar scheme must be used for loan repayment and were of a capital nature.

The Court, in line with the Supreme Court decision, concluded that the incentive received by the assessee was indeed a capital receipt, as it was intended for loan repayment and not part of regular business operations. Therefore, the Tribunal's order did not raise any substantial question of law, leading to the dismissal of the appeal.

In summary, the judgment clarified the distinction between revenue and capital receipts under the Income-tax Act, emphasizing that incentives tied to loan repayment for setting up new units or expanding existing ones are considered capital receipts, as established by relevant legal precedents.