2014 (3) TMI 809 - HC - Income Tax

Power tariff concession - Whether the Tribunal was right in law in holding that the Power Tariff Incentive received by the appellant from the Government is a revenue receipt liable to tax Held that - The decision in Sahney Steel And Press Works Limited And Others Versus Commissioner of Income-Tax 1997 (9) TMI 3 - SUPREME Court followed - the basic test to be applied in judging the character of the subsidy - the character of the receipt in the hands of the assessee whether Revenue or capital has to be determined with respect to the purpose for which the subsidy was given and that the point of time at which it is paid, its source or its form were irrelevant - if the object of the subsidy was to enable the assessee to run the business more profitably then the receipt is on revenue account - on the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit, then the receipt of the subsidy was on capital account. The condition is not contingent upon establishment of the unit, but, for the purpose of assisting the assessee in carrying out the business operation and the subsidy is given subject to strict compliance of the conditions given in Notification No.G.O.Ms.No.29, Energy (A2), 31.01.1995 Thus, the receipt has to be treated as Revenue receipt, as it is contingent upon the commencement of the production and to enable the assessee to run the business more profitably Decided against Assessee. Deduction u/s 80HHC of the Act - Scrap sales - Whether scrap sales to be included in the total turnover for the purpose of deduction u/s 80HHC of the Act Held that - The decision in Commissioner of Income-tax Vs. Ashok Leyland Ltd. 2007 (2) TMI 151 - HIGH COURT, MADRAS followed - both sides agree that scrap sales is not to be included in the total turnover for the purpose of computing the deduction under Section 80HHC of the Act thus, the order of the Tribunal set aside Decided in favour of Assessee.

Summary

Issues Involved:
1. Whether the Power Tariff Incentive received by the appellant from the Government is a revenue receipt liable to tax.
2. Whether the subsidy received by the appellant prior to commencement of production is a capital receipt.
3. Whether scrap sales should be included in the total turnover for the purpose of computing deduction under Section 80HHC.

Detailed Analysis:

Issue 1: Power Tariff Incentive as Revenue Receipt
The assessee argued that the power tariff concession received from the Tamil Nadu Government should be considered a capital receipt. The Assessing Officer, however, treated it as a revenue receipt, citing the Supreme Court's decision in Sahney Steel and Press Works Ltd. v. CIT, which held that subsidies intended to assist in carrying on business profitably are revenue receipts. The First Appellate Authority and the Tribunal upheld this view, noting that the subsidy was not for setting up the business but for reducing operational costs. The Tribunal relied on the Supreme Court's decision in CIT v. Rajaram Maize Products, which classified power subsidies as revenue in nature. The High Court agreed, emphasizing that the subsidy was contingent upon production commencement and aimed at enabling profitable business operations. Thus, it was ruled a revenue receipt.

Issue 2: Subsidy as Capital Receipt
The assessee contended that the subsidy was received before production commenced and should be treated as a capital receipt. The First Appellate Authority rejected this, stating that the subsidy was linked to production and not capital outlay. The Tribunal and the High Court supported this view, referencing the Supreme Court's decision that the purpose of the subsidy determines its nature. Since the subsidy was intended to assist in business operations rather than setting up the business, it was deemed a revenue receipt.

Issue 3: Inclusion of Scrap Sales in Total Turnover
The Assessing Officer included scrap sales in the total turnover for calculating the deduction under Section 80HHC. The First Appellate Authority and the Tribunal upheld this inclusion. However, the High Court, referencing decisions in CIT v. Lucas TVS Ltd., CIT v. Shiva Distilleries Ltd., and CIT v. Ashok Leyland Ltd., ruled that scrap sales should not be included in the total turnover for Section 80HHC deductions. Both parties agreed on this point, and the High Court set aside the Tribunal's order regarding scrap sales.

Conclusion:
The High Court ruled that the power tariff concession is a revenue receipt liable to tax, rejecting the assessee's claim of it being a capital receipt. However, it agreed with the assessee that scrap sales should not be included in the total turnover for Section 80HHC deductions. The appeal was partly allowed, favoring the Revenue on the power tariff concession issue and the assessee on the scrap sales issue.