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TMI Blog1983 (11) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... tries and Commerce Department dated May 3, 1971. The preamble to both the G.Os. is identical and, therefore, it is sufficient if we notice the reasons for issuance of the said G.Os. as recited in the second G.O. It states : "Having regard to the slow pace of industrialisation in the State particularly in the private sector and with a view to stimulating rapid industrialisation throughout the State, Government had offered facilities and incentives in the G.O. cited for new industrial undertakings. Subsequently, certain issues arising out of the Government order were considered by the Officers' Committee constituted in G.O. Ms. No. 1226, dated 31st December, 1968. At their meeting held on 16th July, 1969, certain clarifications were considered with regard to these issues. Subsequently, the Director of Industries raised further issues for clarification on certain aspects of the G.O. cited and also of the proceedings of the Officers' meeting. " We may set out the relevant portions of the G.O. relevant for the present purpose. " 2. Keeping in view the points raised by the Director of Industries, the Government issued the following order in supersession of the orders issued in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... centives for industrialisation: (i) sale or lease of Government land at concessional rates; and (ii) grant of financial assistance on a priority basis by the State Financing Institutions. Explanation.-`Ayacut areas' mean villages, all or part of the lands of which are included in the ayacut of the irrigation project specified above. The above incentives will be available to all new industrial undertaking which commenced production on or after 1st January, 1969, with investment capital (excluding working capital) not exceeding Rs. 5 crores. The incentives under items (a) to (f) in para. 2 above will be allowed in each case for a period of five years from the date of commencement of production. The concessions will also be available for subsequent expansions (50% and above) of existing capacities provided, in each case, the expansion is located in a city or town or Panchayat areas, other than that in which the existing unit is located." The assessee-Sahney Steel and Press Works Ltd. set up a factory at Patancheru in Medak District, which went into production in the year 1973. The assessee maintains its accounts according to the calendar year. It was, therefore, entitle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, submitted in the first instance that none of the three items comprised in the said amount constitute income as understood in the income-tax law, nor do they fall within the four corners of sub-s. (1) of s. 41. Counsel contended that the said amount represents a voluntary contribution unrelated to the character of the assessee, that it is not a return for the capital, skill or labour employed but a bounty given by the State for the specific purpose of development of industry which the assessee is not entitled to use as he pleases. He contended further that the assessee had no right to receive the said amounts, that it was purely out of generosity that the State made the said grant in terms of the G.O. which was issued long prior to the petitioner commencing production. He also submitted that this amount has to be used specifically for the purpose of development which means for the expansion of the unit and cannot be distributed as profits nor can it be used as any other income of the assessee and, hence, is in the nature of capital receipt. Since it is stated that the decision in this case governs a large number of references now pending in this court, we have heard both t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eart's Monastery , a religious institution was in receipt of certain donations from foreign countries for putting up charitable institutions and for other similar purposes. The donations were being sent regularly over a considerably long period. The Department's contention was that, since the monastery was in receipt of these amounts coming in with a certain regularity over a fairly long period, the same must be treated as income of the Monastery. This view was challenged by way of a writ petition in the Kerala High Court. Section 5(3)(iii) of the Cochin Income-tax Act, in so far as it is relevant, read as follows (at p. 471): " Any income of a religious or charitable institution derived from voluntary contributions and applicable solely to religious or charitable purposes. " The High Court observed (p. 473): " The mere fact that a particular item of receipt does not come within an exemption clause does not mean that it is assessable income. The primary question is whether it is income at all ...... If donations of this kind are assessable income all individuals and bodies other than religious or charitable institutions should be liable to be assessed to income-tax in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The Allahabad High Court held that there was no evidence in the case to show that the payments made by the Nabha State were attributable to any custom, usage or tradition or obligation and there was consequently no origin for the payments which could amount in its nature to a definite source so as to render each payment income and not merely a casual or annual windfall. It was accordingly held that the said payments do not constitute income in the hands of the Rani and were not assessable to income-tax. In that case, though the Rani was receiving the said amounts from the Nabha State regularly, she had no right to the said amounts, which were being made out of pure generosity and which, if stopped, the Rani could not claim as a matter of right, nor could she enforce the payment through a court of law. Mr. Y. V. Anjaneyulu, the learned counsel for the assessee, contended that the said G. O. could be withdrawn at any time by the Government and that neither the assessee nor any other person could compel the Government not to withdraw it. It is true that in para. 8 of G.O. Ms. No. 455, the Government expressly stated : " Government, however, reserve the right to withdraw at any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red that subsidy should be granted to the Industries Department by the Government to defray the loss of revenue likely to be incurred by the Andhra Pradesh Electricity Board. The Director of Industries and Commerce has reported (in his second letter read above) that the present rates of power supply in Andhra Pradesh (as compared to those obtaining for the same loads in neighbouring States like Madras, Mysore and Bombay) have been a contributory cause of the unsatisfactory pace of industrial growth in Andhra Pradesh. He has, therefore, urged the grant of concessional rates of power supply to selected categories of medium and large industries on the following basis : (i) Power tariff rates in Andhra Pradesh should be brought on level with those ruling in Mysore, Madras and Maharashtra for comparable loads. (ii) Concessional power rates should be offered to the following categories of new industries : (a) industries for which power is an important cost factor; (b) industries which require bulk loads; and (c) essential of catalyst industries-the establishment of which will attract other industries to this State. (iii) Concessional power rates to be offered to new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he orders. We are unable to see how it could be called a windfall or a casual receipt." We are of the opinion that the principle of this decision squarely governs the present case, just as in that case the assessee had to obtain the approval of the Screening Committee appointed by the Government to obtain the benefits of that G.O., the assessee in this case had to, and did, obtain a certificate from the Director of Industries, on the basis of which he became entitled to the benefits under G.O. Ms. No. 455. For these reasons, we reject the contention that the refund of the said amount was purely voluntary in nature, or that it was in the nature of windfall or a generous bounty on the part of the State. We hold that the assessee had a right to the said refund in terms of the said G.O. which he could enforce in a court of law. The G.O. was issued prior to the setting up of the industry by the petitioner and it did expect to receive the said benefits and it did receive them. The source as well as the payments were both certain and definite. (ii) We shall now consider whether the said payments were unrelated to the character of the assessee or the business carried on by it. We t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt in question was refunded or paid to the assessee because he had set up a new industrial undertaking and has commenced producing goods and continued in production. It is not possible to divorce the said payment from the character of the business carried on by the assessee. Reference may be made in this connection to cases holding that the income derived from sale of import entitlements, which were granted on account of export performance of the assessee, is income within the meaning of s. 28(iv). It was held that the import entitlements were issued only because of, and by virtue of, the exports made by the assessee, they must be treated as profits of business: vide Agra Chain Manufacturing Co. v. CIT [1978] 114 ITR 840 (All) and Kesoram Industries and Cotton Mills Ltd. v. CIT [1978] 115 ITR 143 (Cal). (iii) In Ostime (H. M. Inspector of Taxes) v. Pontypridd and Rhondda joint Water Board [1946] 28 TC 261 ; 14 ITR (Supp) 45, 47 (HL), Viscount Simon stated the following two propositions (p. 278): " The first proposition is that, subject to the exception hereafter mentioned, payments in the nature of a subsidy from public funds made to an undertaker to assist in carrying on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... everal times. The Revenue included these payments in the profits and gains of the company and sought to tax them. When the matter came before the House of Lords, Lord Buckmaster held that it was not a trading receipt and that (p. 353): " It was a grant which was made by a government department with the idea that by its use men might be kept in employment, and it was paid to and received by the Dock Company without any special allocation to any particular part of their property, either capital or revenue, and was simply to enable them to carry out the work upon which they were engaged, with the idea that by so doing people might be employed. I find my self quite unable to see that it was a trade receipt, or that it bore any resemblance to a trade receipt. " Lord Atkin dealt with the matter in the following words (p. 353): "It appears to me that when these sums were granted and when they were received, they were received by the appropriate body not as part of their profits or gains or as a sum which went to make up the profits or gains of their trade. It is a receipt which is given for the express purpose which is named, and it has nothing to do with their trade in the sense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the word " development": " A gradual unfolding, a bringing into a fuller view; a fuller discovery or working out of the details of anything as a plan, a scheme, a plot of novel. (c) The bringing out of the latent capabilities (of anything); the fuller expansion of any principle or activity; (4) gradual advancement through progressive stages ; growth from within;... " It, therefore, cannot be said that the said refunds were made only for the expansion of the unit. They were made with a view to strengthen the unit financially so that it can be run efficiently, and can become strong and grow. It is well-known that in the initial stages of any industrial unit, it has to face a number of problems, sometimes referred to as " teething problems ". Very of ten, they are not able to avoid suffering losses in the initial years. It is for this reason that a number of benefits are given at this stage of development like tax holiday, initial depreciation on machinery and so on. The subsidy in question is also of such a nature and can not be treated as one exclusively meant for expansion of the unit. The word " development " used in para. 6 of the G.O. has not been defined. The said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Government by its resolution dated February 22, 1950, that the object underlying the grant of subsidy was to enable the assessee-company and Tata Chemicals Ltd. to carry on their business of soda ash profitably ... Such receipt under the tests laid down by Viscount Simon is clearly a revenue receipt and has to be taken into account in arriving at the income, profits and gains of the business. " We have already pointed out that a subsidy to assist the business of an undertaking can be given in several ways. The method adopted in Dhrangadhra Chemicals' case [1977] 106 ITR 473, is one such. In the case before us too, the subsidy is given for strengthening and improving the industrial undertaking so that it can work properly and grow. This is another method. Bat in both cases the subsidy is given to assist the business of the undertaking. We are, therefore, of the opinion that the receipt of the said subsidy or refund, as it may be called, is of a revenue nature and cannot be called a capital receipt in the hands of the assessee. (iv) We shall now deal with the main and primary submission of Mr. Y. V. Anjaneyulu, the learned counsel for the assessee, that the said refund c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervations of the Privy Council in Shaw Wallace's case [1932] 2 Comp Cas 276, with respect to the meaning of the word " income " should be read with reference to the facts of that particular case. Indeed, the Privy Council had pointed out in Gopal Saran Narain Singh (Maharajkumar) v. CIT [1935] 3 ITR 237 (PC), that the word " income " is not limited by the words " profits and gains " and that " any thing which can properly be described as income is taxable under the Act unless expressly exempted ". There is another major reason why we cannot accept the proposition that the element of return is an essential ingredient of every income. If this were so, then the dicta of Viscount Simon in Ostime (H. M. Inspector of Taxes) v. Pontypridd and Rhondda joint Water Board [1946] 28 TC 261 ; 14 ITR (Supp) 45 (HL), as also the decision of the Bombay High Court in Dhrangadhra Chemical Works Ltd. v. CIT [1977] 106 ITR 473 (Bom), should be wrong and this is not suggested by Mr. Anjaneyulu. Indeed, the observations of Viscount Simon show that even by 1946, the pro position was well established that subsidies made to an undertaker to assist him in carrying on the undertaker's trade or business are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sented refund of sales tax paid by the assessee or whether it is a contribution and grant made by the State adopting the basis of sales tax only as a measure. Once we hold that the subsidy constitutes income in the hands of the assessee, the said distinction, if any, becomes merely academic. (II). The next question is whether the three items comprised in the said refunded amount or any of them fall within the four corners of s. 41(1). Section 41(1) of the I.T. Act reads as follows 41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and, accordingly, chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement's case [1979] 117 ITR 770 (AP), the facts of which we have referred to hereinbefore. It was observed (at p. 777): " In the present case, the assessee had paid the electricity charges at the original rate in full and claimed an allowance in respect of the said expenditure. In pursuance of the policy of the Government to supply electricity at a concessional rate of 20% less, the above amounts were paid to the assessee towards the expenditure incurred by him in regard to electricity charges and hence they should be deemed to be profits and gains of the business. All the requirements of s. 41(1) of the I.T. Act have been fulfilled. " It must be noticed that even in Panyam Cement's case [1979] 117 ITR 770, the subsidy was given not by the Electricity Board but by the Government and yet it was held that the subsidy made by the Government falls within s. 41(1). Mr. Anjaneyulu then argued that what is refunded is not sales tax but a subsidy measured in terms of the sales tax paid. This is again an argument which is merely academic. Section 41(1) creates a fiction; what is not income in the ordinary sense of the term is deemed to be income under this provision. Once the amount r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e having died meanwhile, his executors received the amounts-certain amounts by way of compensation in terms of the Peace Treaty. The compensation paid was calculated in terms of the interest the said securities would have earned in the normal course. (During the war years, the interest was not remitted). The Court of Appeal held that what was received was compensation in terms of the Peace Treaty, and not interest and, hence, not taxable, notwithstanding the fact that the measure adopted for determining the quantum of compensation was the interest that would have accrued. The next case relied upon is S. R. Y. Sivaram Prasad Bahadur v. CIT [1971] 82 ITR 527 (SC), wherein it was held that interim payments under s. 50(2) of the Madras Estates (Abolition and Conversion into Ryotwari) Act, 1948, received every year by a former holder of an estate during the period between the taking over of the estate and final determination and deposit of compensation under the Act, are of a capital nature and not liable to income-tax. Firstly, this case does not arise under, nor does it consider, s. 41(1). Secondly, the nature of the payments fell to be determined in the light of the provisions of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, viz., 10% Central Outright Grant of Subsidy Scheme of 1971. It is not a circular applicable to all types of subsidy schemes. This much is conceded by Mr. Anjaneyulu also. But what he argues is that inasmuch as our scheme is in the same terms as the Central Scheme of 1971, the principle of the said circular should be applied. We are unable to accede to this contention. We cannot extend the scope of the circular by analogy. Secondly, on a perusal of the Central Scheme of 1971, we find that the scheme concerned therein was not in the same terms as the State Scheme with which we are concerned herein. The subsidy under the Central Scheme was available only to the industrial units with a capital of less than fifty lakhs whereas the State scheme is applicable to units with a capital up to five crores. The circular was applicable only to those industrial units which were located in the specified districts/areas called "selected districts/areas " whereas the State scheme is applicable to industries located throughout the State. To those industries which are located in the specified backward districts, certain additional incentives are provided under the State scheme. Paras 5 to 7 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unable to discern any principle behind such a distinction. The power conferred by the Board by s. 119 cannot be put on a higher footing than the rule making power and it is well-settled that the rule-making authority cannot travel beyond the four corners of the Act, nor can it make a rule contrary to the provisions of the Act. Indeed in Jalan Trading Co. Private Ltd. v. Mill Mazdoor Sabha [1966] 36 Comp Cas 901 ; AIR 1967 SC 691, the provision empowering the Central Government to remove doubts or difficulties in giving effect to the provisions of the Act was struck down as amounting to delegation of the legislative power to executive authority which is impermissible. However, Mr. Anjaneyulu has brought to our notice a decision of the Supreme Court in Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913, where at page 921, the Supreme Court observed as follows: " Now, coming to the question as to the effect of instructions issued under section 5(8) of the Act, this court observed in Navnit Lal C. Javeri v. K. K. Sen , Appellate Assistant Commissioner, [1965] 56 ITR 198 (SC) : It is clear that a circular of the kind which was issued by the Board would be binding on all officers and perso ..... X X X X Extracts X X X X X X X X Extracts X X X X
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