2008 (9) TMI 14 - SC - Income Tax

Co-operative Sugar Mill amount received by the assessee under Incentive Subsidy Scheme could be utilized only in repayment of term loans so it was not in the course of a trade but was of capital nature, hence not includible in total income for allowing exemption u/s 80 P(2)(a)(i) in respect of interest received from the members, matter is remanded to examine the Memorandum & Articles of Association, Return of Income & decide whether banking/credit facilities are provided to members or not

Summary

Issues Involved:
1. Whether the incentive subsidy received by the assessee is a capital receipt not includible in the total income.
2. Whether the assessee was entitled to exemption under Section 80 P(2)(a)(i) of the Income Tax Act, 1961, in respect of interest received from the members of the society.
3. Whether the area development funds collection by sugar mills would be a trading receipt.

Detailed Analysis:

Issue 1: Incentive Subsidy as Capital Receipt
The primary question was whether the incentive subsidy received by the assessee is a capital receipt not includible in the total income. The court examined four incentive subsidy schemes from 1980, 1987, 1988, and 1993, which were similar except in details. The schemes aimed to make new sugar factories economically viable by providing benefits such as higher free sale sugar quotas and excise duty rebates.

The Department argued that the additional revenue from higher free sale sugar quotas and retained excise duty should be considered revenue receipts, citing the case of Sahney Steel and Press Works Ltd. The assessee contended that the subsidies were capital receipts meant for repaying loans to set up or expand units, applying the "purpose test" from the same case.

The court noted that the schemes were designed to address economic viability issues due to high costs and lack of financial institution support. The subsidies were intended to enable the establishment or expansion of sugar factories, not to supplement trade receipts. The court applied the "purpose test" and concluded that the subsidies were capital in nature as they were meant for repaying term loans for setting up new units or expanding existing ones.

Issue 2: Exemption under Section 80 P(2)(a)(i)
The second question was whether the assessee was entitled to exemption under Section 80 P(2)(a)(i) of the Income Tax Act, 1961, for interest received from society members. The court found that none of the authorities, including the High Court, had examined the Memorandum of Association, Articles of Association, or the Return of Income filed by the assessee. The court emphasized that to earn exemption under Section 80 P(2), a co-operative society must prove it is engaged in the business of banking or providing credit facilities to its members. The court remitted the matter to the Tribunal for de novo consideration, instructing it to examine the necessary documents to determine eligibility for the exemption.

Issue 3: Area Development Funds as Trading Receipt
In the civil appeal arising out of SLP (C) No. 573/07, the question was whether the area development funds collected by sugar mills would be considered a trading receipt. The court referred to the judgment of the Bombay High Court in CIT v. Chhatrapati Sahakari Sakhar Karkhana Ltd. and remitted the matter to the Tribunal for de novo consideration in accordance with the law and the directions given in the cited case.

Conclusion:
The Supreme Court concluded that the incentive subsidies were capital receipts and not includible in total income, remitted the question of exemption under Section 80 P(2)(a)(i) for further examination, and directed a de novo consideration for the classification of area development funds. The appeals filed by the Department were partly allowed with no order as to costs.