Additional Commissioner of Income Tax vs S. Krishnaswamy Reddiar

Ismail, J.—The Income Tax Appellate Tribunal, Madras Bench, u/s 256(1) of the I.T. Act, 1961, at the instance of the Addl. CIT, Madras,

has referred the following question for the opinion of this court :--

Whether, on the facts and in the circumstances of the case, it was rightly held by the Tribunal that the receipt of Rs. 15,000 and Rs. 21,605 found

in the '' Estate and Properties Account'' for each of the assessment years could not be the subject-matter for consideration by the AAC, as the

same were not the subject-matter of consideration before the ITO ?

The short facts which have given rise to the above question are as follows : The assessee is a resident individual whose income mainly consists of

income from the business of bus transport in India and a half share income from the non-resident firm of Pussethanna Estate, Gombola, Ceylon,

which owns certain tea estates. No assessment has been made in India on the said foreign firm. The assessee maintained an account called ""Estate

and Properties Account"". For the assessment years 1966-67 and 1967-68, the said account-showed the following amount as received by subsidy

and expenses :

Assessment year Received by way of subsidy Expenses

Rs. Rs.

1966-67 15,000 22,888

1967-68 21,605 37,281

The assessee claimed for the assessment years 1966-67 and 1967-68 replacement expenditure of Rs. 22,888 and Rs. 37,281 debited to the

Estate and Properties Account "" in the respective years as admissible revenue expenditure, as the firm had been paid subsidy by the Tea Control

Department of Ceylon. The ITO disallowed the assessee''s claim holding that by this expenditure, an asset of enduring advantage and benefit had

been brought into existence and, therefore, the expenditure was clearly capital in nature. When the assessee contested this conclusion of the ITO

before the AAC, the AAC agreed with the assessee that the expenditure cannot be considered as a capital expenditure and deleted the

disallowance made for both the years. It is admitted that neither the ITO nor the AAC dealt with the subsidy referred to above either as a capital

or as a revenue receipt in their respective orders, though the ITO was fully aware of the receipt of the said amount as subsidy. The department

preferred an appeal against the order of the AAC to the ITA Tribunal. Before the Tribunal it was not the contention of the department that the

expenditure of Rs. 22,888 and Rs. 37,281 was not admissible being capital expenditure, but its contention was that the two sums should be

reduced by Rs. 15,000 and Rs. 21,605, respectively. The ITA Tribunal found that the ITO had not considered at the stage of assessments

whether any income referable to receipts from subsidy from the Ceylon Government was taxable or not and in particular whether the quantum of

the expenditure of Rs. 22,888 and Rs. 37,281 would require to be reduced by any such income ; that in the grounds of appeal before the AAC

and in the course of the contentions urged before him, there was no reference at all to the matter of the receipts referable to the subsidy ; that the

scope of the appeal decided by the AAC was restricted to the claim for deduction of the two sums of Rs. 22,888 and Rs. 37,281 and it did not

embrace either the question of increasing the income declared in the return by including the income referable to the receipts of Rs. 15,000 and Rs.

21,605 or by decreasing the amount of expenditure claimed as a deduction by these two amounts ; and that in considering those aspects in the

departmental appeals at that stage, the Tribunal would be travelling beyond the scope of the subject-matter of the appeals before the AAC. The

Tribunal also held that it could not be said that the department was aggrieved by the order of the AAC or could object to those orders because the

AAC could not be expected to consider an aspect which was not the subject-matter of appeal before him and which indeed had not been taken

into account in the assessments made by the ITO. In addition to referring to these aspects, as what was the subject-matter of controversy before

the AAC, the Tribunal has held that there was no indication at all that the ITO had applied his mind to the nature of the receipt from the subsidy

and whether it was includible in the income or not. Having said so, the Tribunal, however, stated :

Indeed, even at the present stage, there is no material on record to determine the exact nature of the subsidy and whether it could be considered

to be in the nature of income or not "".

Thus, it will be seen from the perusal of the order of the Tribunal that the Tribunal dismissed the appeal of the department on two alternative

grounds, namely, (1) the controversy could not be gone into by the Tribunal because the same was not the subject-matter of appeal before the

AAC ; (2) there was no material on record to determine the exact nature of the subsidy and whether it could be considered to be in the nature of

income or not. It is the correctness of this conclusion of the Tribunal that is challenged in the form of the question extracted above.

In view of one feature present in this case, we consider that the question actually referred to this court is academic and it is unnecessary to

answer the same. We have pointed out already that the Tribunal had categorically stated that even before it there was no material on record to

determine the exact nature of the subsidy and whether it could be considered to be in the nature of income or not. Apart from the use of the word

subsidy"", there was nothing on record to show that the amount received from the tea control department by the firm in Ceylon had the character

of income. It is now well-settled that the burden is on the department to prove that a particular receipt bears the character of income. Only when a

particular receipt bears the character of income, the burden will be on the assessee to prove that it is exempt from taxation under any of the

provisions of the Act. Consequently, the basic question in this case was regarding the character of the subsidy, i.e., whether it was receipt in the

nature of income or receipt in the nature of capital. The assessee himself did not put forward any contention that it was a receipt in the nature of

income; nor did the ITO or the AAC decide that the receipt was in the nature of income. It is under those circumstances that the Tribunal pointed

out that even before it there was no material on record to determine the exact nature of the subsidy and whether it could be considered to be in the

nature of income or not. It must necessarily follow that the department had failed to establish the character of the receipt as income. The learned

standing counsel for the department contended before us that the assessee himself took the subsidy only as in the nature of income. For this

purpose, he relied on the following passage occurring in the order of the ITO relating to the assessment year 1966-67 ;

It was contended on behalf of the assessee that this (expenditure) should be allowed as revenue expenditure, as the assessee is deriving subsidy

from the tea control department of Ceylon "".

From this alone no inference could be drawn that the assessee conceded that the subsidy had the character of income. As a matter of fact, this

contention was put forward before the Tribunal itself and the Tribunal rejected the same in the following terms ;

It was urged by Shri Ramakrishna (departmental representative) that what is stated in the above extract shows that the Income Tax Officer had

considered whether or not the receipt of Rs. 15,000 was taxable and that the Appellate Assistant Commissioner ought to have reduced the

admissible expenditure of Rs. 22,888 by Rs. 15,000 before giving a direction that the revenue expenditure is admissible.

This contention of Shri Ramakrishna is not acceptable. It was only the contention of the assessee that because certain subsidy was received from

the Ceylon Government the expenditure of Rs. 22,888 should be treated as revenue expenditure. In what is extracted above, the ITO merely

rejected this contention. There is no indication at all that he has applied his mind to the nature of the receipt from the subsidy and whether it was

includible in the income or not"".

In view of this, we are of the opinion that the assessee had never conceded that the subsidy had the character of income nor the ITO or the

AAC decided that the said subsidy had the character of income. Under these circumstances, it was clear that the department bad not--established

that the subsidy had the character of income, in which case alone the actual expenses could have been adjusted against the receipt of the subsidy.

This conclusion of the Tribunal has not been specifically challenged in the form of an appropriate question referred to this court and what is

challenged is only the alternative ground given by the Tribunal holding that since the matter was not the subject-matter of consideration before the

AAC, it could not be urged before the ITA Tribunal in an appeal preferred by the department.

Hence, the said conclusion of the Tribunal has become final and on that conclusion the department is bound to fail and, therefore, it has become

unnecessary to answer the question actually referred to this court.

Under that circumstances, the reference is returned without the question being answered. There will be no order as to costs.