2005 (4) TMI 30 - HC - Income Tax

1. Whether Tribunal was legally correct in holding that the 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? 2. Whether Tribunal was legally correct in deleting the disallowance made under section 43B in respect of unpaid production incentive bonus covered under section 36(1)(ii)? - Both the questions are answered in favour of the Revenue

Summary

Issues Involved:
1. Taxability of the incentive received by the assessee as capital or revenue receipt.
2. Deductibility of unpaid production incentive bonus under section 43B of the Income-tax Act.

Detailed Analysis:

Issue 1: Taxability of the Incentive Received by the Assessee as Capital or Revenue Receipt

The primary question was whether the incentive of Rs. 2,10,67,677 received by the assessee as additional quota for free sale sugar is to be treated as a capital receipt or a revenue receipt. The assessee, a co-operative society engaged in the manufacture and sale of sugar, had received this incentive under the Sampat Incentive Scheme, which allowed for reduced excise duty on additional free sale sugar quota. The benefit was to be used for repaying term loans and other capital expenses.

The Income-tax Appellate Tribunal had held that the incentive was on capital account and not taxable as a revenue receipt. However, the High Court referenced the Supreme Court's decision in Sahney Steel and Press Works Ltd. v. CIT [1997] 228 ITR 253, which established that subsidies received to assist in carrying on trade or business are trading receipts. The court noted that the incentive was given to assist in business operations after production had commenced, making it a revenue receipt. The High Court concluded that the Tribunal was incorrect in treating the incentive as a capital receipt and ruled in favor of the Revenue.

Issue 2: Deductibility of Unpaid Production Incentive Bonus under Section 43B

The second issue was whether the unpaid production incentive bonus of Rs. 13,98,899 could be disallowed under section 43B of the Income-tax Act. The assessee had debited this amount to the profit and loss account, but it remained unpaid at the end of the year. The Assessing Officer added this unpaid amount to the income of the assessee, arguing that it fell under section 36(1)(ii) and could only be deducted on actual payment as per section 43B.

The Commissioner of Income-tax (Appeals) upheld the disallowance, noting that the liability had not crystallized as the U.P. Co-operative Sugar Factories Federation had not approved the payment. The Tribunal, however, allowed the deduction, stating that it was a productivity-linked bonus related to the business.

The High Court, referencing section 43B(c) which mandates actual payment for deductions, ruled that since the amount was not paid during the relevant assessment year, the deduction could not be allowed. The Tribunal's decision to delete the disallowance was deemed incorrect, and the High Court ruled in favor of the Revenue.

Conclusion:

Both issues were resolved in favor of the Revenue. The incentive of Rs. 2,10,67,677 was deemed a revenue receipt and taxable as such. The unpaid production incentive bonus of Rs. 13,98,899 was disallowed as a deduction since it was not actually paid during the relevant assessment year. The High Court's judgment emphasized adherence to established legal principles and statutory provisions, ensuring that the tax treatment aligned with the nature of the receipts and the timing of the payments.