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TMI Blog2008 (12) TMI 307X X X X Extracts X X X X X X X X Extracts X X X X ..... 0th May, 2006 recording the reasons as follows: "Reasons for reopening of case under s. 147 r/w s. 148 of the IT Act, 1961. Return declaring loss of Rs. 24,43,73,550 was filed by the assessee on 29th Nov., 2003 and the same was processed under s. 143(1) on 20th Jan., 2004. Subsequently, the assessee filed revised return on 31st March, 2004 declaring loss of Rs. 26,22,91,189. A perusal of the balance sheet filed with the return shows reserve fund amounting to Rs. 25,49,13,868.52 as on 31st March, 2003 as against Rs. 34,13,698.52 as on 31st March, 2002. The increase of Rs. 25,15,00,000 (Rupees twenty five crores fifteeen lakhs) in the general reserve fund account represents the conversion of RDF loan into grant-in-aid by Sugarfed Punjab, Chandigarh, which was granted to the Sugarfed Punjab, Chandigarh by the Punjab Rural Development Board, Chandigarh, vide its letter No. PRDB/A/3/2-3/1625, dt. 31st Dec., 2002. The grant-in-aid of the total amount or RDF loan along with interest was given to the assessee as per letter No. PSEB/ALV.F.123/89, dt.3rd Jan., 2003 by the Executive Director, Punjab, Sugarfed, Chandigarh, wherein, it was communicated that the RDF loan given to the co-operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advocate, Shri M.R. Sharma, vide letter dated nil, which reads as follows: (a) That the perusal of the reasons recorded would reveal that the loan converted into grant-in-aid is proposed to be added to the income of the assessee under the provisions of sub-s. (iv) of s. 28 of the IT Act. The provisions of the said sub-section read as under: "The value of any benefit or perquisite, whether the convertible into money or not arising from business or exercise of a profession." (b) The intention of the legislature in enacting this provision is very clear when it provides for that it is non-monatory benefit or perquisites which are covered under this sub-clause. I am enclosing herewith the photocopies of the letter of sanction of loan by the Punjab Rural Development Board, Chandigarh, which has been further transferred to the abovenoted assessee. The perusal of the sanction orders would reveal that the amounts were disbursed to the abovenoted assessee as loans during the period from 1991-91 to 2001-02. A statement issued by the Punjab Rural Development Board, dt. 31st Dec., 2002 vide which the loans already granted during the abovenoted period have been converted into grant-in-aid rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; --- "It has been decided that the above loans given out of the Rural Development Fund be converted into the grant. Accordingly Punjab Rural Development Board has converted above loans given to Sugarfed to the tune of Rs. 190 crores released out of Rural Development Fund, along with interest into grant-in-aid." (c) Further perusal of the record reveals that Rural Development Board at the time of extending the amount to the abovenoted assessee clearly indicated that it is an loan and it carries interest at a particular rate thereon. Thus, it is clear from the perusal of the abovenoted letter that all these amounts were loans which were advanced to the various mills during the financial year from 1991-92 to 2001-02 as per details abovementioned. It is submitted that the conditions of the loans have been mentioned in the letters issued by the Punjab Rural Development Board from time-to-time, a copies of the letters are being enclosed for your perusal and record. Thus, from the perusal of these documents i.e. sanction orders as well as the orders converting the loans int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort, the Central Government introduced cl. 5-A in the Sugarcane Control Order, 1966 the material part of which is "Additional price for sugarcane purchased on or after 1st Oct., 1974 where the producer of sugar or his agent purchases sugarcane from a sugarcane grower during each sugar year he shall in addition to the minimum sugarcane price fixed under cl. 3 pay to the sugarcane grower an additional price, if found due, in accordance with the provisions of the Second Schedule annexed to the order further provided that the Central Government or the State Government, as the case may be may authorize any person or authority, as it thinks fit, for the purposes of determining the additional price payable by a producer of sugar under sub-cl. (1) and the person or authority as the case may be who determines the additional price shall intimate the same in writing to the producer of sugar and the sugarcane grower connected with the supply of sugarcane to such producer of sugar". (e) That the Government of Punjab during the years under consideration notified State advised price as per the provision of cl. 5 above and the price is over and above the price fixed under cl. 3. The appellant by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or transaction with firm. It did not represent the value of any benefit or perquisite arising from the business of the assessee company. This amount therefore would not partake of the character of income. The amount was not includible in the total income of the assessee company under s. 28(iv). It is submitted that the Hon'ble Madras High Court in the case of CIT vs. Ponni Sugars & Chemicals Ltd. (2003) 179 CTR (Mad) 477 : (2003) 260 ITR 605 (Mad) has held in similar circumstances that the same is capital receipt and revenue receipt. Similarly, the Hon'ble Supreme Court of India in the case of State of Tamil Nadu & Ors. vs. Kothari Sugars & Chemicals Ltd. & Ors. 101 STC 197 has held that for the purposes of payment of purchase tax it is the price fixed under cl. 3 and not cl. 5 which is relevant and binding on the manufacturers of sugar. Further, the Hon'ble Calcutta High Court in the case of CIT vs. Anand & Co. (1999) 151 CTR (Cal) 699 : (1998) 233 ITR 18 (Cal) has decided the similar issue and has held that such grants do not fall within the purview of s. 28 of the IT Act. In similar circumstances, the Hon'ble Madhya Pradesh High Court in the case of CIT vs. Rajaram Maize Prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d used in this section also embraces passive as well as active user. Thus, where the assessee was a member of ginning factories pool but his factory did not work under pool agreement it was held that the assessee was entitled to depreciation. Hon'ble Punjab & Haryana High Court in the case of CIT vs. Pepsu Road Transport Corporation (2002) 172 CTR (P&H) 72 : (2002) 253 ITR 303 (P&H) has held that depreciation is admissible where the machinery is available for use. The Jaipur (sic-Jabalpur) Bench of the Tribunal in the case of Packwell Printers vs. Asstt. CIT (1997) 59 ITD 340 (Jab) has held that the test of user would be applied upon the block as a whole instead of an individual assets therefore, depreciation was allowed on all the trucks of the assessee though one of the trucks was not being used for the business. (b) The CBDT has in its wisdom issued Circular No. 469, dt. 23rd Sept., 1986 [(1987) 59 CTR (St) 9] explaining the amended provisions as under: "As mentioned in the Economic Administrative Reforms Commission Report the existing system in this regard requires the calculation of depreciation in respect of each capital asset separately and not in respect of block of asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with the return of income would reveal that these expenses are on account of salary and other expenses paid to the employees and also rates and taxes paid during the year under consideration. In this connection, it is further submitted that with regard to the expenses paid to the employees on various accounts, the assessee co-operative society is running a sugar mill as well as distillery unit. Both the factories are in the same premises and there is no separate either management or society. It is only for the administrative convenience that the figures with respect to the distillery and sugar mill were separately shown in the annexures attached to the balance sheet, which fact is evident from the perusal of the record. The same is regularly employed system of accountancy under which the accounts are maintained and there is no change in the system of accounts during the last 10 years. Thus, there is no question of such expenses being disallowed for any reason whatsoever it may be. The perusal of the record of assessment would reveal that the employees of the assessee to whom the salary and other payments have been made were working for the assessee sugar mill. The employees as su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore raised with regard to the reopening of the assessment proceedings for the purposes of reassessment may kindly be decided by passing an order as contemplated as per the provisions of law and interpreted by the Hon'ble Supreme Court of India in the case of GKN Driveshafts (India) Ltd. vs. ITO & Ors. (2003) 179 CTR (SC) 11 : (2003) 259 ITR 19 (SC) in view of the facts and circumstances and the judicial decisions in this behalf. The assessee seeks personal hearing in the matter in accordance with the provisions of law. 6. The perusal of the reasons recorded as mentioned above would reveal that the AD while initiating the proceedings has mentioned that the AD received information from the Asstt. CIT, Circle 2, Amritsar. This information on the basis of which the proceedings were initiated in this case pertained to an amount of Rs. 25.15 lacs being the amount of loan which was waived or converted into grants in aid only and not with respect to the other two reasons recorded while initiating the proceedings in this case. The information with regard to these two reasons formed part and parcel of the record of assessment of the appellant assessee. Thus, the AO has incorrectly assumed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was duly complied with by the appellant. During the course of assessment proceedings queries were raised by the AO with regard to RDF loan of Rs. 25,15,00,000. In this respect, it is submitted that the assessee was granted loan at Rs. 190 lacs (sic-crores). The year-wise details have already been given in the above paras." Being not satisfied with the explanation of the assessee, the AO made an addition of Rs. 25,15,00,000 towards grant-in-aid as benefit or perquisite arising from business as contemplated in s. 28(iv) of the IT Act, 1961. Further, he made an addition of Rs. 29,07,740 by disallowing expenses debited in the manufacturing and trading accounts which related to the distillery unit. Further, he disallowed Rs. 3,87,637 on account of depreciation relating to distillery unit. Further, the claim of the assessee towards deduction under s. 80P(2)(a)(iii) was also disallowed by the AO. Against this, the assessee was in appeal before the learned CIT(A). The learned CIT(A) confirmed the order of the AO. Aggrieved, the assessee is in appeal before us. The assessee has raised following grounds: 1. (a) That the order of the AO as upheld by the CIT(A) holding Rs. 25,15,00,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which reads as under: "No. PRDB/A-3/2002/1625 Dt.: 31st Dec., 2002 To The Managing Director, Surgarfed, Chandigarh. Subject: Conversion of loan given to Sugarfed into grant. Loan to the tune of Rs. 190 crores was given to Sugarfed from time-to-time as per the details given below: (Rs. in crore) PRDB/92/104, dt. 24th April, 1992 &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the conversion of loan into grant-in-aid does not constitute a profit chargeable in the hands of the assessee and it also does not fall under the purview of s., 41(1) or s. 28(iv) of the IT Act, 1961 and for this purpose. he relied on the order of Tribunal, Delhi Bench, in the case of Dy. CIT vs. Tosha International Ltd. (2008) 116 TTJ (Del) 941. The loan originally granted is capital receipt in nature, cannot lose its character even on its conversion into grant-in-aid. He relied on the order of Tribunal, Hyderabad Bench, in the case of APR Ltd. vs. Dy. CIT (2003) 87 ITD 618 (Hyd). Further, he relied on the order of the Tribunal, Chennai Bench, in the case of Fidelity Textiles (P) Ltd. vs. Asstt. CIT (2008) 305 ITR 97 (Chennai)(AT). Further, he submitted that at the time of sanctioning grant-in-aid, it is neither subsidy nor rebate nor concession given to recoup revenue expenditure and this cannot be termed as revenue receipt. He further relied on the decision in Chengalrayan Co-operative Sugar Mills Ltd. vs. Dy. CIT. There is no remission of liability on account of grant-in-aid as it cannot be a revenue receipt. He relied on judgment of Hon'ble Bombay High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he judgment of Hon'ble Supreme Court in the case of CIT vs. Sirpur Paper Mills. Further, reliance was made in the case of State of Tamil Nadu & Ors. vs. Kothari Sugars & Chemicals Ltd. & Ors. 5. The learned Departmental Representative, on the other hand, pleaded that the impugned amount represented conversion of RDF loans into grant-in-aid received from Sugarfed Punjab, Chandigarh, which in turn had been granted to the Sugarfed Punjab, Chandigarh, by the Punjab Rural Development Board, Chandigarh, vide its letter No. PRDB/A-3/2003/1625, dt. 31st Dec., 2002. The grant-in-aid was given by converting the total amount of RDF loan and interest thereon. Consequently, the assessee had written off its liability on account of interest of RDF loan pertaining to earlier year upto 31st March, 2002 and shown it as cessation of liability under s. 41(1) of the Act and it had taken the remaining amount of principal portion to its general reserve account in the balance sheet. He submitted that it was questioned why the amount was taken to the general reserve account instead of showing as revenue receipt, the assessee claimed that it was a capital receipt. He submitted that the assessee has claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a position to allow cash credit limit to these mills; the remaining two co-operative mills, namely. Ajnala and Jagraon will also have positive worth, once they are given grant to clear cane arrears pertaining to last year." 5.1 He further submitted that grant-in-aid given to waive the loan and interest outstanding, this is nothing but revenue receipt. It was given to sugar mills for the purpose of smooth functioning and carrying on the business without Government's standing guarantee to their availing cash credit limits from co-operative banks. Actually, the Government is required to stand guarantee to the loan availed by the co-operative society from the co-operative bank. In view of the inability of the Government to stand guarantee to the loans availed by the co-operative society and also to make net worth of the co-operative society positive. the Government decided to give grant-in-aid to run the business of the co-operative society smoothly and converted the RDF loan and interest thereon into grant-in-aid. He submitted that grant-in-aid was given to assist the assessee to carry its business on its own and it was not given at the time of commencement of the business as it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Originally, the RDF loan was given to the assessee to compensate the assessee on account of the price difference paid by the assessee to the farmers. The assessee was directed to pay additional price for sugarcane purchased on or after 1st Oct., 1974 to the sugarcane growers by the assessee. The Government as per cl. (3) of the control order issued under Essential Commodities Act, 1955, fixed the minimum price for sugarcane for each season. The assessee by virtue of the Government order has made payment to the various sugarcane growers, which resulted in losses to the assessee and the sugar mill sought for the waiver of the RDF loan originally granted and interest thereon. On hearing the plea of the assessee. Government of Punjab sanctioned grant-in-aid and converted RDF loan as grant-in-aid. The assessee treated the waiver of the interest as trading receipt and offered to tax. However, the grant-in-aid received towards principal portion of loan was carried to the general reserves. The RDF loan was given basically to meet the additional expenses of payment of higher prices to the sugarcane growers. The sugar mills suffered financial problem on account of excess payment made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operational mills will become positive and they will not require any Government guarantee for cash credit limit from co-operative banks. The banks will therefore be in a position to allow cash credit limit to these mills; the remaining two co-operative mills, namely, Ajnala and Jagraon will also have positive worth, once they are given grant to clear cane arrears pertaining to last year." 6.1 Originally, the RDF loan was given to the assessee company to compensate the additional payment made to the farmers over and above the statutory minimum price fixed of sugarcane by the Government. The sugarcane being the raw material supplied to the assessee company and for which the assessee company is paying more than the statutory minimum price, on that reason, the assessee incurred revenue loss/trading loss. The payment for raw material is on revenue account. To compensate this, the assessee got the RDF loan. Later on, the RDF loan and interest thereon were converted into grant-in-aid. From this point of view, grant-in-aid is nothing but revenue receipt as RDF loan was given to meet expenses on account of raw material. For this purpose, we place reliance on the judgment of Hon'ble Madra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. It was true that the assessee could not use this money for distribution as dividend to its shareholders. But, the assessee was free to use the money in its business entirely as it liked and was not obliged to spend the money for a particular purpose. The subsidies had not been granted for production of, or bringing into existence any new asset. The subsides were granted year after year, only after the setting upon of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee. The subsidies were of revenue nature and would have to be taxed accordingly." The amounts received by the assessee are not in the nature of the receipts, which would augment its profit or loss account, but the receipts are to enable its function. This is evident from the minutes of the meeting held on 6th Nov., 2002 which was headed by the Chief Minister of Punjab. If the payments had been made by the Government to enable the assessee either to augment its P&L a/c, they co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remission of that loan by sanctioning grant-in-aid, since the assessee not being in a position to repay the same, that receipt is to be considered as trading receipt. We place reliance on the judgment of Hon'ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons Ltd. (1996) 136 CTR (SC) 444 : (1996) 222 ITR 344 (SC), wherein it has been held that if an amount is received in the course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee. The situation is not different in the present case. The amount outstanding as RDF loan ceased to exist on receipt of grant-in-aid and the assessee transferred this grant-in-aid to the general reserve account, obviously treating them to be the profits. Therefore, in our opinion, the Hon'ble Supreme Court's decision cited supra applies in all force. In that view of the matter, we are of the opinion that the credit balance writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... character of the revenue receipt. Further, the judgment of the Hon'ble Gujarat High Court in the case of CIT vs. Alchemic (P) Ltd. relied on by the learned Authorised Representative is not relevant because in the present case, grant-in-aid is given for the smooth functioning of the business and not a refund of excise duty. Hence, this judgment cannot be applied. Further, the judgment relied on in the case of Bhavnagar Bone & Fertiliser Co. Ltd. relied by the learned Authorised Representative has no relevance. In that case, there had been running current account maintained by the company with a firm, whose partners were directors of the company, for adjusting liabilities of the firm. The Hon'ble High Court has held that there was no nexus which is an essential prerequisite to bring to charge the benefit between the transactions and the business of the assessee. The facts of the assessee's case are totally different. Hence, this ratio cannot be applied. In the case of CIT vs. Anand & Co., wherein it has been held that in case cash assistance received from a private body which has nothing to do with any service rendered by the assessee to the private body is not a revenue receipt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n nature and being the original loan was given to compensate the assessee from suffering from the revenue loss and the waiver of such loan is to be revenue in nature. Accordingly, we dismiss the ground of the assessee. 7. The next ground No. 3 is relating to the disallowance of Rs. 29,07,740 being the amount of expenses of the assessee as per the audited accounts. 8. We have heard both the parties and perused the material placed on record. In this case, the distillery unit was closed in the assessment year under consideration. It was not functioning. The assessee was maintaining separate sets of books for distillery unit and sugar unit. Separate profit and loss, balance sheet, manufacturing and trading accounts have been prepared. As the distillery unit was closed since 1997, there was no production whatsoever. In spite of this, the assessee claimed expenditure relating to distillery unit. The contention of the assessee is that the distillery unit and sugar unit are inter-linked and inter-laced and it is an integral part of assessee's business. This contention of the assessee cannot be accepted. There is no business activity of the distillery unit and separate sets of books of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion-Assessee continued to claim depreciation on ponds so surrendered along with land even though it had written off same in its books of account on ground that cost of those ponds formed part of block of assets of 'plant and machinery' on which depreciation @ 25 per cent had already been allowed-AO disallowed depreciation claim as plant and machinery being 'ponds' of assessee were neither owned nor used by it after 1994-CIT(A) upheld disallowance-Whether as no money whatsoever was payable to assessee on handing over ponds constructed on leased land to owners of land, there could be no amount whatsoever that could be reduced from block of assets and, hence block continued at its WDV-Held, yes-Whether once an asset forms part of block, it loses its identity and question of assigning any value to particular asset forming part of block does not arise and, consequently, depreciation cannot be disallowed on that part of block on ground that a particular asset forming part of block has been discarded or not owned or used by assessee-Held, yes-Whether, therefore, in view of interpretation of concept of 'block of assets', depreciation on ponds which formed part of block of assets had to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mic Administrative Reforms Commission Report, the existing system in this regard requires the calculation of depreciation in respect of each capital assets separately and not in respect of block of assets. This requires elaborate bookkeeping and the process of checking by the AO is time-consuming. The greater differentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc. the more disaggregated has to be the record-keeping. Moreover, the practice of granting the terminal allowance as per s. 32(1)(iii) or taxing the balancing charge as per s. 41(2) of the IT Act necessitates the keeping of records of depreciation already availed of by each asset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has introduced a system of allowing depreciation on block of assets. This will mean the calculation of lump sum amount of depreciation for the entire block of depreciable assets in each of the four classes of assets, namely, buildings, machinery, plant and furniture." Here also, there is no question of block of assets. 11. The last ground in assessee's appeal is regarding disallowance of deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds of appeal are also dismissed. 15. As regards ground No. 3, the contention of the assessee is that the conversion of loan into grant-in-aid should be assessed in the year of actual receipt of loan and not during the year under consideration. This ground of the assessee is misplaced. As such, the argument of the assessee is also contrary to the provisions of s. 5 of the IT Act. Sec. 5 reads as under: "5. Scope of total income.-(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year: Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-s. (6) of s. 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to the provisions of this Act, the total income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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