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TMI Blog1993 (7) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... eturned income of Rs. 1,50,34,560. The various additions made by the ITO were agitated by the assessee-company before the first appellate authority who allowed the appeals of the assessee partly. Certain additions made by the ITO were deleted by the CIT(Appeals) against which the Revenue has come up in appeal before us. 3. The first issue regarding addition on account of power subsidy, is common to all the three assessment years under consideration. During the years under consideration, the assessee received subsidy from Andhra Pradesh State Electricity Board (hereinafter called APSEB for brevity) as under : Assessment year Subsidy received Rs. 1984-85 67,01,570 1985-86 76,87,863 1986-87 28,13,523 The assessee, in the returns of income filed before the ITO, had claimed that the subsidy received from APSEB was capital in nature and hence it was not assessable to tax under the provisions of the Income-tax Act. The assessee had in its books of account transferred the subsidy to the Capital Reserve Account from Revenue Account. The ITO, however, noticed that APSEB had in fact deducted the subsidy from the electricity bills and had collected only the net amount. The I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representative. The sum and substance of the contention of the Revenue before us is that the large amount of subsidy received by the assessee was revenue in nature, that the subsidy was received to supplement the revenue expenditure incurred in initial stages of the industry and that the power consumed is for the production of commercial goods on which profits arise and on no account could it be connected with formation of assets of enduring nature so as to characterise the receipt as capital. The Revenue, in its argument, principally relied upon the decision of the Andhra Pradesh High Court in the case of Panyam Cements Mineral Industries Ltd. v. Addl. CIT [1979] 117 ITR 770 and Sahney Steel Press Works Ltd. 6. On the other hand, the assessee, represented by Sri S.E. Dastur, Advocate, who was assisted by Sri P.J. Pardiwala and Sri S. Ravi, Advocates, strongly argued that the power subsidy is a capital receipt not liable to tax. It is pointed out that the assessee was registered with the Additional Director of Industries, Nalgonda, Andhra Pradesh, by proceedings No. 7645/Desk 10(2) dated 31-3-1983 for 15% outright grant under the Central Investment Subsidy Scheme, 1971. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidy granted by G. O. Ms. No. 224 is interest subsidy for educated self-employed or technocrats where the capital does not exceed Rs. 5,00,000. This is obviously for the purpose of alleviating the unemployment problem among the educated. 10. The third incentive is interest-free sales-tax loan. Undertakings set up in the municipal limits of Hyderabad, Secunderabad, Vijayawada and Visakhapatnam are excluded from consideration. The quantum of loan was to be determined with reference to the quantum of sales-tax paid to Government of Andhra Pradesh on the construction material, plant and machinery and purchase tax and sales tax payable for a period of 5 years subject to certain limits. In G. O. Ms. No. 224, it is explicitly stated that the Scheme of State Incentives will be operated on the model of Central Subsidy Scheme. The entrepreneurs would have to register with the Director of Industries for claiming further incentives. 11. G.O. Ms. No. 224 has three annexures. Annexure I specifies the list of backward blocks and talukas under. the Six Point Formula excluding Central investment subsidy areas and scheduled areas. Annexure II specifies the list of scheduled (tribal) areas in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trict Industries Centre, makes it clear that power subsidy was also part of the package of incentives offered by Government of Andhra Pradesh in G.O. Ms. No. 224 dated 9-3-1976. The learned counsel continues and states that this is further evident from G. O. Ms. No. 375 dated 23-8-1985 which replaced G. O. Ms. No. 224 with effect from 1-4-1984, refers to the incentives and subsidies granted under G. O. Ms. No. 224 of 1976 and includes in the list power subsidy. APSEB issued B. P. No. 691, Comml. dated 10-8-1976 adopting the criteria set up by the State of Andhra Pradesh in G. O. Ms. No. 654 for the grant of power subsidy. The list of excluded industries specified in Annexure to B.P. No. 691 is identical with the list in Annexure III to G. O. Ms. No. 224. 13. The learned counsel further states that it is not disputed, and it cannot be, that power subsidy granted by Government of Andhra Pradesh is one of the incentives which are passed on by the State through APSEB. In other words, the source of subsidy is Government of Andhra Pradesh while the medium of disbursement of subsidy is chosen to be APSEB. 14. On the aforesaid facts, it is urged that the question is whether the subsidy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. relied on by the Revenue, has in fact no application to the facts of the case. In that judgment, he points out, the High Court was concerned with the interpretation of another G.O., viz., G.O. Ms. No. 678 dated 27-4-1961. The argument advanced on behalf of the assessee in that case was that the benefit of power tariff concession could not be taxed inasmuch as it was a windfall income or a casual or non-recurring receipt. The court held that even if it was to be held a casual and non-recurring receipt, in view of the fact that it arose from the carrying on of business, the same could be brought to tax. The other question with which the High Court was concerned was whether the rebate in charges received by the assessee was exigible to tax under section 41(1) of the IT Act. It may be noticed that no argument had been advanced before the Andhra Pradesh High Court in that case that the receipt in question was capital in nature. It is a settled proposition of law, as has been enunciated by the Gujarat High Court in CIT v. Chunilal Khushaldas [1974] 93 ITR 369, that a judgment is not an authority on an issue which has not been argued and considered by the court. The learned counsel ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt subsidy is on capital account. Whereas there was such a subsidy under G.O. Ms. No. 654, there was no such subsidy under G.O.Ms. No. 455. The said judgment of the Andhra Pradesh High Court is, however, an authority for the purpose of showing that all subsidies are not a necessarily revenue in character. In fact, that was the argument which had been canvassed on behalf of the Revenue before the Andhra Pradesh High Court. This was, however, repelled by the High Court by stating that it was not willing to accept the proposition on such a broad footing. Under G.O. Ms. No. 455, as noticed by the High Court, the subsidies, refunds and other financial concessions were deemed to be development grants. The High Court analysed the meaning of the word "development" and found that they were with a view to strengthen the unit financially so that it can run efficiently and can become strong and grow. In contrast, G.O. Ms. No. 224 does not state that the subsidies are deemed to be development grants. Having regard to the fact that it was for establishing the unit, the subsidies are capital in nature. 17. Further, the learned counsel draws our attention to the decision in the case of Senairam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong case in support of the decision of the CIT(Appeals). It is seen from the G. Os. under reference that the power subsidy as per G.O. Ms. No. 455 dated 3-5-1971 was given to the industrialists for the developmental activities. As a matter of fact, the relevant portion of the G. O. has been extracted by the CIT(Appeals) in para 5.4 of his order which clearly indicates that the said subsidy was a development grant which, in our view, cannot be considered as a revenue receipt. A reading of the G.O. as a whole also goes to prove that Government of Andhra Pradesh, through APSEB had given the subsidy for the development of the industry and for rapid industrialisation of the State of Andhra Pradesh. Therefore, the character of such a subsidy has to be capital in nature. The principle that a capital receipt spells capital expenditure or vice versa is simple but is not necessarily sound. The argument that ordinarily the nature and character of a receipt is the same as that of expenditure with regard to a particular transaction and that an amount received as capital receipt would be capital expenditure in the hands of the payer cannot be accepted as universally correct. The cases of the pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Since the three subsidies mentioned above were held to be capital in nature, the power subsidy, being one of the package of incentives and forming part of the same scheme, cannot be taken out separately and treated as a revenue receipt. Considering all the facts and circumstances of the case, therefore, we are of the view that the CIT(Appeals) was justified in deleting the addition. We, therefore, uphold his decision. 21. The next issue regarding disallowance under section 43B is relevant only to assessment years 1985-86 and 1986-87. For assessment year 1985-86, the assessee's accounting period ended on 30-6-1984 and for the said period, the assessee had collected the following amounts which were not remitted by it to Government, viz.: Rs. (1) APGST 38,78,700 (2) CST 3,41,489 (3) Karnataka sales tax 1,87,688 (4) Surcharge on KST 23,769 (5) Tamilnadu GST 10,57,755 (6) Surcharge on TNGST 1,05,775 (7) EPF 577 (8) Differential APGST at H.O. 3,11,335 (9) Outstanding turnover tax 1,23,228 --------------------- Total : 60,30,116 --------------------- Similar details for assessment year 1986-87 are as under : Rs. (1) Karnataka sales tax 2,91,567 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time though after the end of the accounting year relevant to the assessment year under consideration. If the payment has been made by the assessee during the time allowed, no disallowance under section 43B could therefore, be made. We have gone through the assessment orders of the ITO and the appellate order of the CIT(Appeals) and find that the dates of payment have been mentioned and, therefore, we restore this matter back to the Assessing Officer with a direction that if the assessee has made the payment, within the stipulated time, no disallowance need be made under section 43B of the IT Act. Subject to above, this ground is treated as allowed. 24. Ground Nos. 3 and 4 of the Revenue are relevant for assessment year 1985-86 only and are related to Mineral Rights Tax and excess provision for Mineral Rights Tax. Both the grounds are dealt with together for the sake of convenience. 25. Before we come to the reasons for which the disallowance has been made by the department and it has-been deleted by the CIT(Appeals), it is essential to briefly mention the legislative background of the relevant legislation. The Legislature of Andhra Pradesh had enacted the Andhra Pradesh (Minera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, Government of Andhra Pradesh issued G.O. Ms. No. 360 dated 12-8-1985 reducing the percentage of tax to 300% from 900%. 27. During the accounting year ending on 30-6-1984, the assessee made a total provision of Rs. 1,20,54,940 for the royalty payable in terms of G.O.Ms. No. 23, dated 18-1-1984 and MRT Act. The entire provision made by the assessee was disallowed by the ITO. He disallowed a sum of Rs. 33,61,656 holding that it was a tax and the provisions of section 43B of the IT Act applied and inasmuch as the amount had not been paid, it was not allowable as a deduction. Insofar as the excess provision is concerned, the ITO did not consider its allowability. 28. The CIT(Appeals), however, allowed the provision for mineral rights tax entirely. He held that insofar as the provision to the extent of Rs. 31,96,720 is concerned, the provisions of section 43B of the IT Act did not apply, because it was a cess and section 43B covers cess only with effect from 1-4-1989. With respect to the balance of Rs. 88,58,220 which was the excess provision for mining rights tax (in view of the subsequent reduction by G.O.Ms. No. 360, dated 12-8-1985). the CIT(Appeals) upheld the assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd of mineral rights tax earlier collected, the court had made it prospective. The assessee, the learned counsel points out, relies in this regard on Article 265 of the Constitution of India according to which "No tax shall be levied or collected except by authority of law". The assessee's case is that the compulsory exaction, which has no authority of law, cannot be called a tax. Consequently, the provisions of section 43B can have no application. The learned counsel submits that the sum of Rs. 31,96,720 is not a tax but is a sum which the Government is permitted to retain by virtue of the orders of the High Court. It is a compulsory exaction not being a tax and the authority not to refund flows from the court order itself. In this regard, the learned counsel places reliance upon the decision of the Delhi Bench of the Income-tax Appellate Tribunal in LAC v. Dalmia Cement (B.)Ltd. [1991] 37 ITD 335 (Delhi) where on consideration of identical facts, he points out, the Tribunal was pleased to hold that the provisions of section 43B of the IT Act did not apply. Insofar as the excess provision is concerned, the learned counsel submits that inasmuch as the liability had arisen within th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e collection should be made by authority of law. In other words, unless the tax has been lawfully levied, it cannot be collected and unless the tax is lawfully levied, it cannot fall under the provisions of section 43B of the IT Act. We have mentioned above that the High Court of Andhra Pradesh has already given a finding that only Parliament is empowered to legislate on the subject and, therefore, the tax imposed by Government of Andhra Pradesh was perhaps contrary to the constitutional provisions. Such being the case, the imposition cannot be a tax and cannot fall under section 43B of the IT Act. 32. Similar issue was considered by the ITAT, Delhi Bench 'A' in the case of Dalmia Cement (B.) Ltd. In the said case, the assessee-company had been allowed to quarry limestone in certain areas by the State Government. In respect of such quarrying, the assessee had to pay certain royalties to the State Government and cess in respect of royalty payable under section 115 of the Madras Panchayat Act. On appeal, the High Court stayed the payment of cess and the assessee made an appeal to the Supreme Court. As per the aforesaid levy, the assessee had to pay certain amount representing the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service conditions between the assessee and its employees stipulate that privilege leave lying to the credit of the employees in excess of 30 days can be allowed to be encashed for the following purposes, viz., (i) Marriage of self, daughter/son or dependent sister/brother ; (ii) Ceremonial occasions or functions necessitating large expenditure on the part of the employee ; (iii) Overseas or outstation education of children ; (iv) Prolonged sickness of employee or his dependent ; (v) Payment of insurance premium or public provident fund ; (vi) Purchase of land and construction of house or own building ; and (vii) Purchase of vehicle or conveyance. This facility given by the assessee to its employees is a facility in service and not a retirement facility. The assessee had to provide for payment of cash for unutilised portion of employees' leave during the year of account. The assessee claimed deduction in the three years under consideration on the ground that it is an ascertained liability and the expenses are incidental to the business of the assessee. The ITO, however, for the reasons mentioned by him, did not agree with the assessee and disallowed the amount unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned counsel points out that the assessee is entitled to the deduction. The learned counsel brings to our notice the judgment of the House of Lords in Southern Railway of Peru Ltd. v. Owen (Inspector of Taxes) [1957] 32 ITR 737. The relevant passage from the said judgment at page 754 is extracted below : "...whereas it is possible that any one of its many employees may forfeit his benefit and so never require a payment, the substantial facts of the situation are that when the company has paid every salary and wage that is due for current remuneration of the year it has not by any means wholly discharged itself of the pecuniary burden which falls upon it in respect of the year's employment. This is a long-term application of the practice by which provision for holidays with pay in the coming year is charged in part against the receipts of the previous year." The learned counsel points out that this judgment of the House of Lords has been quoted with approval by the Supreme Court in Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53. On the basis of the facts of the case, the learned counsel asserts that the provision for leave encashment is an admissible ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of fact, the learned departmental representative is of the view, that the assessee had deliberately avoided meeting the levy obligation and that it did not receive any demand notice to pay the difference. The learned departmental representative has heavily relied on the fact that the assessee-company itself had reversed the entry in the subsequent year and, therefore, he urges that the demand should not be allowed to be deducted. 45. On the other hand, Sri Dastur opposes the contention of the learned departmental representative. He points out that Government of India had issued Cement (Control) Order, 1967, in exercise of the powers conferred under section 18G and section 25 of the Industries (Development Regulation) Act, 1951 (65 of 1951). In terms of clause 1A of the said Order, the provisions thereof, excepting clause 9A, were to apply in relation to levy cement. The expression "levy cement" is defined in clause 2(d) of the said Order. Under clause 3 of the said Order, no purchaser can remove cement, whether sold or unsold, except with previous permission in writing of the Central Government. Under clause 9 of the Control Order, there is a compensatory payment to be made to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was always held accountable for the excess collection, pending the decision of the Supreme Court. The provisions of the Levy Sugar Price Equalisation Fund Act, 1976, clearly imposed an obligation on the assessee to repay the money to the constituents whether the excess price was collected before or after the commencement of the Act. Therefore, the assessee did not collect the excess sale price as part of its trading receipts." The learned counsel, therefore, contends that the action of the Assessing Officer is not correct. 49. The facts of the case suggest that the diversion of part of the assessee's stock in levy account to the open market was on account of commercial expediency. It was not a failure on the part of the assessee to fulfil its quota in levy account, but it was the failure of the authorities to clear the levy cement on which the assessee had no control. It was also true that as per the provisions, the assessee had to fulfil its quota of levy cement, if not in this year, then in the next year. We are, therefore, of the view that the assessee's case is supported not only by the decisions adverted to by the CIT (Appeals) but by the decision of the jurisdictional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new asset into existence. Such a replacement of engine in the said decision was held to be a revenue expenditure. Similarly, the issue was also examined by the Andhra Pradesh High Court in the case of Nathmal Bankatlal Parikh Co. v. CIT [1980] 122 ITR 168 (FB), in which the replacement of old diesel engine by a new one did not bring any new asset into existence, in the opinion of the Honourable High Court. The expenditure incurred, therefore, was held to be in the nature of current repairs and hence admissible. Respectfully following the judicial precedents adverted to above, we are of the view that the CIT(Appeals) was justified in allowing the claim of the assessee. 54. The next issue in these appeals is regarding investment allowance on certain assets. This issue is relevant for assessment years 1984-85 and 1985-86. The assets on which the investment allowance was claimed are as under : Name of the asset Cost Rs. (1) Air-conditioners 79,587 (2) Plant roads 1,52,139 (3) Telephone exchange 99,960 For assessment year 1985-86, the assessee claimed investment allowance of Rs. 77,614 on the cost of a new air-conditioner. The ITO examined the claim of the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITO to ascertain whether the air-conditioners are installed in the office or in the factory. If the air-conditioners are installed in the office, the assessee would not be entitled to investment allowance. However, if such air-conditioners are installed in the factory, we direct the Assessing Officer to allow the investment allowance. 59. Corning to the investment allowance on plant roads, we are of the view that the assessee is not at all entitled to the investment allowance in view of the decision of the Supreme Court in the case of CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. [1992] 196 ITR 149. We, therefore, reverse the decision of the CIT(Appeals) on this count. This ground of the Revenue is thus partly allowed. 60. The last issue raised by the Revenue is relevant for assessment years 1985-86 and 1986-87 and is regarding the expenditure on maintenance of guest house. For assessment years 1985-86 and 1986-87, the ITO had disallowed Rs. 57,335 and Rs. 82,843 respectively. The assessee had argued before the ITO that the expenses were allowable. In appeal, the CIT(Appeals) examined the issue and was of the view that 50% of the expenses should be allowed towards expenses relating ..... X X X X Extracts X X X X X X X X Extracts X X X X
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