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TMI Blog2013 (11) TMI 1488X X X X Extracts X X X X X X X X Extracts X X X X ..... n the receipt of such aid could be termed as capital in nature - If the financial assistance is extended to run business more profitably or to meet recurring expenses, such payment will have to be treated as revenue receipt - In the present case, the financial assistance was extended neither for setting up any unit or expansion of existing business or for acquiring any assets - Decided in favour of Revenue. - I.T.A.No. 489/2007 C/W I.T.A. No. 59/2007 & I.T.A.No. 488/2007 - - - Dated:- 9-10-2013 - Dilip B Bhosale And B Manohar, JJ. For the Appellant : Sri K V Aravind, Adv For the Respondent : Sri Malhara Rao for Sri P Dinesh, Adv JUDGEMENT :- PER : Dilip B. Bhosale J. These three appeals are arising from two orders passed by the Income Tax Appellate Tribunal in three appeals, filed by one and the same assessee. The assessment year in ITA 59/2007 is 1999-2000; in ITA No.488/2007:2000-2001 and in ITA No.489/2007:2001-2002. The order of the Tribunal, impugned in ITA No.59/2007, is dated 16.06.2006 whereas, the order passed by the Tribunal in the appeals, from which, ITA Nos.488/2007 and 489/2007 arise is dated 31.01.2007. The facts and circumstances involved in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, rejected his request for adjournment and asked Mr.Malhara Rao and Mr.Vinay for M/s.Harish Co., the advocates on record to make submissions on merits. They both, it seems were ready to argue on merits, advanced arguments on behalf of the assessee, to which we would make reference in the later part of the judgment. 4. The assessee is a company incorporated under the provisions of the Companies Act, 1956. The assessee is engaged in the business of manufacturing Digital Electronic switching systems, computer software and also software services. They had filed return of income for the Assessment years 1999-2000, 2000-2001 and 2001-2002 declaring loss of Rs.9,08,30,417/- for the assessment year 1999-2000; Rs.7,29,68,898/- for 2000-01 and Rs.45,64,59,705/- for 2001-02. Insofar as the assessment year 1999-2000 is concerned, it was processed under Section 143(1)(a) of the Income Tax Act (for short the Act') on 30.03.2001 accepting the returned loss and accordingly a refund of Rs.33,79,222/- including interest under Section 244A of Rs.7,13,155/- was granted. Subsequently, the case was selected for scrutiny by issue of notice under Section 143(2) of the Act. In response to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as revenue income, it would amount to taxing the parent company itself. The other reason is that the parent company paying its subsidiary company, is within the same group and not for any purpose which is in the nature of income so as to be treated as taxable income". (Emphasis supplied) 7. Mr.Aravind, learned counsel appearing for the revenue submitted that the monies paid by Siemens AG to the assessee were of revenue account and was paid not only to make good the loss but to make the assessee's company run which had no monies to spend over day today expenditure to keep it running at the relevant time. He submitted that on the basis of the said monies/aid extended by Siemens AG, the assessee not only made their loss good, but started running their business in profit. He submitted that who paid the amount is absolutely an irrelevant fact and what is important is the object for which such assistance was extended. From the facts of the present case, he submitted that, it is clear that in the assessment year 1999-2000, the assessee's company had suffered loss. Whereas in the subsequent assessment years, 2000-01 and 2001-02, it started making profit which fact clearly shows th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given through price and duty differentials, the character of the impugned incentive in that case was revenue and not capital in nature. On the other hand, according to the assessee, what was relevant to decide the character of the incentive is the purpose test and not the mechanism of payment. In this backdrop, the Supreme Court in paragraph-14 of the report observed thus:- "In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this Court in the case of Sahney Steel Press Works Ltd. (supra). In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10 percent of the Capital investment calculated on the basis of the quantum of investment in capital and therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of refund of sales tax on raw materials, machinery and finished goods were also of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The contention of the assessee in that case was dismissed by the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which determines the nature of the incentive subsidy. The form the mechanism through which the subsidy is given is irrelevant." (emphasis supplied) 10. Further, the Supreme Court after considering its judgment in Sahney Steel, observed and noted that the assessee was free to use the money in its business entirely as it liked. It was not obliged to spend the money for a particular purpose. In the case of Seaham Harbour Dock Co., vs. Crook (1931) 16 Tax Cases 333 (HL), the assessee was obliged to spend the money for expansion of six docks. That aspect was taken into consideration as an important aspect. In this backdrop, the Supreme Court further observed that "in the present case (Ponni Sugars Chemicals) also, receipt of the subsidy was capital in nature as the assessee was obliged to utilize the subsidy only for repayment of term loan undertaken by the assessee for setting up new units/expansion of existing business." 11. In Sahney steel's case, the payments were made only after the industries had been set up. Payments were not made for the purpose of setting up of the industries, but the package of incentives in that case were given to the industries to run more profita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01-2002. In this backdrop, if the purpose test is applied, it is clear that the payment was made by Siemens AG as recurring expenses/working capital. 13. It is not clear from the order of the Tribunal on what basis it observed that M/s.Siemens AG paid the assessee or compensated the assessee in view of the continued losses, and such financial aid was extended to augment the capital base and to improve the net worth which had eroded the losses suffered by the company. The facts on record speak otherwise. Only in the assessment year 1999- 2000, the assessee had suffered loss and thereafter, in the assessment years 2000-01 and 2001-02, the assessee made profit. These facts, on the other hand, support the case of the revenue that the financial aid was extended by Siemens AG not only to make good the loss for the assessment year 1999-2000 but to see that the company run more profitably. 14. It is the object which is relevant for the financial assistance which determines the nature of such assistance. In other words, the character of the receipts in the hands of the assessee has to be determined with respect to the purpose for which payment was made. If the financial assistance is ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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