Commissioner of Income Tax vs Kerala Land Development Corpn. Ltd.

Mrs. K.K. Usha, J.—These reference applications u/s 256(1) of the income tax Act, 1961 (''the Act'') at the instance of the revenue arise from a common order of the Tribunal, Cochin Bench dated 29-5-1992 in IT Appeal Nos. 922, 923 and 924 (Coch.) of 1986. Relevant assessment years are 1980-81, 1981-82 and 1983-84. Following are the questions raised for opinion of this Court:

Whether, on the facts and in the circumstances of the case and also considering the decision in Kesaria Tea Co. Ltd. Vs. Commissioner of Income Tax, , the subsidy received by the assessee is not assessable under IT Act?

Whether, on the facts and in the circumstances of the case and also considering the objects of the assessee-company the terms of relevant draft schemes, with or without modification, the Tribunal is right in law and fact in holding--

(i) the cost of work was not to include charges for establishment and supervision;

(ii) these expenses have to be born by the assessee;

(iii) there was always a deficit in the Revenue account;

(iv) it was for this reason that the Government had agreed to pay to the assessee the subsidy;

(v) it does not spring from any activity carried on by the assessee;

(vi) the amount so received would not partake of the character of a revenue receipt;

(vii) without grants from the Government there would be no possibility of the assessee carrying on its activity for long;

(viii) the contribution made by the Government therefore were to augment the capital of the assessee....;

(ix) this is not a trading receipt...it was not received...in the character of a trader;

(x) it is for that reason the subsidy is granted by the Government and are not the above findings wrong, unreasonable and inconsistent with the draft schemes and the object of the assessee-company?

The relevant facts are as follows: Assessee, the Kerala Land Development Corporation Ltd., is a Government Company registered under the Companies Act, 1956. Under the provisions of the Kerala Land Development Corporation Ltd. (Special Powers) Act, 1974, the assessee-Corporation has been vested with certain powers to facilitate the execution of land development schemes in the State of Kerala. Section 3 directs the assessee to prepare a draft scheme, if it is of opinion that it is expedient and in the public interest to execute a scheme in any area. After the preparation of the scheme, it would be enquired into and objections would be invited from general public. Ultimately, if it is decided to execute the same, the Corporation shall submit the same to the Government for appropriate orders. The scheme would be then published for information of the general public. Thereafter, it is the duty of the Corporation to get the work executed. Section 10 provides that every owner of land included in the scheme shall pay cost or part of the cost as the same may be, of the work which under the scheme, is carried out by the Corporation and has benefited his land. There is liability to pay contribution by persons other than the owners of the land included in the scheme, if they are also benefited by such work. The persons who are thus liable to pay contribution towards cost, have an obligation to pay interest also. But, there is no provision under the Act which would enable the Corporation to receive contribution by the beneficiaries towards cost of overhead charges expended by the Corporation. As a result, the assessee-Corporation was always on a deficit in the revenue account and Government had agreed to pay assessee''s subsidy to set off the deficit. The ITO treated the amount received as subsidy from the Government as a revenue receipt and it was brought to tax.

Aggrieved by the assessment orders as above, assessee filed appeals before the Commissioner (Appeals) who upheld the contention of the assessee that the subsidy received could not be treated as an income. The matter was taken up in appeal by the revenue before the Tribunal, which did not accept the contention of the revenue that subsidy received by the assessee from the Government to meet the revenue expenditure is an income liable to be taxed. Dismissing the appeals, the Tribunal held that the receipt was in the nature of a capital receipt and would not partake the character of a revenue receipt. The above finding is under attack in these tax reference cases at the instance of the revenue.

Before we go into the issue raised in these cases, we will first examine the nature of the duties cast on the assessee-corporation by the statute, its activities and its right to get subsidy from the State Government. The Kerala Land Development Corporation Limited (Special Powers) Act, 1974 invests the assessee-Corporation with certain powers to facilitate execution of land development schemes in the State of Kerala. The Act came into force with effect from 21-11-1973. Section 3 of the above statute provides that whenever the Corporation is of opinion that it is expedient and in public interest to execute a scheme in any area, it may prepare a draft scheme containing necessary particulars as provided under the Act. The scheme may relate to control and prevention of soil erosion, preservation and improvement of soil, reclamation of waste, saline or water-logged areas etc.... The scheme will be published inviting objections from the public and an Enquiry Officer appointed by the Corporation or the Government would enquire into the objections received. He would submit those objections to the Corporation together with his report thereon and his recommendations, if any, for the modification of the draft scheme.

After considering objections and report etc., the Corporation may either decide to execute the same with or without modification or abandon the scheme. Government has the power to sanction the draft scheme with or without modification or reject the same. The scheme thus finally decided to be executed will be published and thereafter, the Corporation would go ahead with the work either directly or through the owner of the land on which the work is to be executed or through a committee constituted under the Kerala Land Development Act, 1964 or through any other person. Section 10 provides that every owner of the land included in the scheme shall pay the cost or part of the cost, as the case may be, of the work which, under the scheme, is carried out by the Corporation and has benefited his land. Persons other than the owners of the land who are benefited by the scheme have also to make payment to the Corporation by way of contribution. Provision is made for interest u/s 11 on such cost, part of the cost, contribution or expenses as the case may be, at such rate and with effect from such date as may be prescribed. Provisions contained under the Kerala Land Development Corporation Ltd. (Special Powers) Rules, 1976 issued by the Government of Kerala in exercise of the powers conferred by sub-section (1) of section 25 of the Kerala Land Development Corporation Ltd. (Special Powers) Act, 1974 would show that in computing the contribution as provided u/s 10, establishment charges and supervision charges of the Corporation shall not be taken into consideration. There is no provision under the Act or the rules regarding payment of subsidy by the Government. Since the establishment charges and supervision charges were to be borne by the Corporation itself, it always had a deficit in the revenue account. Government, therefore, agreed to pay to the Corporation a subsidy which may or may not be equal to the amount which the assessee-corporation have to spend, but could not collect from its beneficiaries. These facts are not in dispute. It is in the light of the above undisputed facts, we have to proceed to consider the rival contentions regarding the exigibility to tax of the subsidy paid by the Government.

It is contended on behalf of the revenue that the subsidy received by the assessee constitutes revenue receipt and it is income in its hands. In support of the above contention, the learned standing counsel for the revenue relied on the following decisions-Pontypridd & Rhondda Joint Water Board v. Ostime (H.M. Inspector of Taxes) [1946] 14 ITR (Suppl.) 45 (HL) Raghuvanshi Mills Ltd. Vs. Commissioner of Income Tax, Bombay City, , Dhrangadhra Chemical Works Ltd. Vs. Commissioner of Income Tax, Bombay City II, , Commissioner of Income Tax Vs. Swadeshi Cotton Mills Co. Ltd., and Kesaria Tea Co. Ltd. Vs. Commissioner of Income Tax, .

In Pontypridd & Rhondda Joint Water Board''s case (supra), the question that arose for consideration was whether sums received by Pontypridd & Rhondda Joint Water Board to meet an estimated deficiency in the result of what were admittedly trading activities can be taken into account in computing the profits and gains of the Board''s trade. It was held that since assistance was given for the purpose of being used in the business carried on by the Board so as to enable them to meet the trading obligations, the amounts so given are trading receipts. Even though the main judgment was written by Lord Thankerton, the often quoted words from the concurring judgment of Viscount Simon are as follows: ''Payments in the nature of a subsidy from public funds made to an undertaker to assist in carrying on the undertaker''s trade or business are trading receipts, that is, are to be brought into account in arriving at the balance of profits or gains''.

In Raghuvanshi Mills Ltd.''s case (supra), Supreme Court considered the question whether the amount received by the assessee-company under an insurance policy known as ''consequential loss policy'' was income and, therefore, taxable. The assessee-company had insured its Mills with certain insurance companies and had also taken out certain insurance policy of the type known as ''consequential loss policy'' which insured against loss of profit, standing charges and agency commission. The mills were completely destroyed as a result of fire and the assessee-company received certain amounts from the insurance companies. The amounts thus received by the company were treated as part of assessee''s income and it was taxed accordingly. The contention raised by the assessee was that the amounts thus received cannot be called profits because money is only payable if and when there was a loss or partial loss and that something received from the outside source in such circumstances is not money which is earned in the business and if there are no earnings and no profits, there cannot be any income. The above contention was not accepted by the Supreme Court. It was held that section 4 of the Indian income tax Act, 1922 was so widely worded that everything which is received by a man and goes to swell the credit side of his total account is either an income or a profit or a gain. It was also held that the assessee cannot get the benefit of the provisions contained u/s 4(3)(vii) so as to contend that such receipt is not a taxable income. The assessee being a business company and its aim was to make profits and to insure against loss, it is indubitable that the money received from the insurance company is a receipt and in so far as it represents loss of profits, as opposed to loss of capital and so forth, it is an item of income in any normal sense of the term. It was also held that the receipt was inseparably connected with the ownership and conduct of the business and it arose from it. Under these circumstances, assessee was found not entitled to exemption u/s 4(3)(vii).

In Dhrangadhra Chemical Works Ltd.''s case (supra), the Bombay High Court had occasion to consider the nature of the subsidy allowed to the manufacturers of soda ash as per a decision of the Government in February, 1950. During the years 1950-51 and 1951-52, there was a glut in the market of soda ash because of large imports thereof. On representations made to the Government by those who were engaged in the manufacture of soda ash, Government took a decision to allow subsidy of Rs. 1 per cwt. on soda ash produced by the companies mentioned and sold from the date of the resolution, provided the Government was satisfied that the companies actually sold the soda ash at the fair selling price recommended by the Tariff Board. The ITO brought to charge the amount received by the assessee as subsidy from the Government. The above view was affirmed by the appellate authorities. On reference, High Court of Bombay did not accept the contention of the assessee that the receipt of subsidy was of a casual and non-recurring nature and, There-fore, not includible in ascertaining the profits or gains of the business. It was held that where subsidies or grants are given by the Government to assist a trader in his business, they are payments of a revenue nature.

They are supplementary trade receipts and not capitals payments, although they might be called advances or might be subject to contingency or repayment. When subsidy is paid to enable the assessee to carry on their business profitably, such receipts can be only revenue receipt and had to be taken into account in arriving at the income, profits and gains of the business. In the facts of that case, the Court found that the sole object underlying grant of subsidy was that the assessee-company may be able to carry on their business of manufacturer of soda ash profitably in competition with the price of imported soda ash. Reliance had been placed on the decision of House of Lords in Pontypridd & Rhondda Joint Water Board''s case (supra).

In Swadeshi Cotton Mills Co. Ltd.''s case (supra), a decision of the Allahabad High Court, the question which came up for consideration was whether a subsidy received under an export incentive scheme of Government of India can be treated as a revenue receipt and not a receipt of casual nature. The assessee was a manufacturer of cloths and exporting the same outside India. As per the Export Incentive Scheme of Government of India, mills exporting cloth of yarn in excess of the standard prescribed thereto, were entitled to import entitlement equal to 66-2/3 percent of the f.o.b. value on such excess export 35 percent of the import entitlement can be utilised by the mills for importing raw cotton for its own use and the balance had to be surrendered to the Textile Commissioner. In consideration of such surrender of import entitlement, the assessee received a sum as subsidy from the Export Promotion Fund. Assessee contended that the above amount could not be taxed as its income. The above contention was not accepted by the Department. On reference, High Court held that the subsidy received by the assessee would come u/s 28(i) of the Act. Export subsidy would not have been paid to the assessee had he not manufactured cloth and yarn and export it. The payment being directly proportionate to the quantity of goods exported was a revenue receipt, for it was an additional payment received for the goods sold by way of export. Therefore, the amount received by the assessee as exports subsidy was held to be assessee''s income.

The assessee, on the other hand, would contend that none of the decisions relied or by the revenue have application in the facts of this case. We find merit in this submission. In all those cases, the assessees were involved in trading activities, whereas in the case of the Corporation, trading activity is not one of its objects or at any rate, the duties cast on the Corporation as per the provisions contained under the Kerala Land Development Corporation Ltd. (Special Powers) Act, 1974 are not in the nature of a trading activity. There is no question of profit motive when the Corporation discharges its statutory functions. This is clear from the provisions contained under sections 3, 10 and 11 of the Act. Apart from the above, the subsidy granted by Government covers only the supervision charges and overhead expenses of the Corporation while it discharges its statutory duties. Therefore, subsidy received by the assessee cannot be treated as trade receipt.

In Crook v. Seaham Harbour Dock Co. [1931] 48 TLR 91 (HL), House of Lords considered the liability to pay income tax on grant received by the company from the Unemployment Grants Committee. A dock company, contemplating on extension of its dock, applied to the Unemployment Grants Committee for financial assistance. The Committee made payments as grant from time to time as the work progressed equivalent to half the interest for two years on approved expenditure met out of loans. Assessments to income tax were made upon the company on the ground that these payments were part of its annual profits or gains. Holding that receipt of such grant cannot be included in the revenue for the purpose of income tax, Lord Atkin observed as follows:

It appears to me that when these sums were granted, and when they were received by the appropriate body not as part of their profits or gains or 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 in which you are considering the profits or gains of the trade. It appears to me, with respect, to be quite irrelevant whether the money, when received, is applied for capital purposes or is applied for revenue purposes; in neither case is the money properly said to be brought into a computation of the profits or gains of the trade.

The principle contained in the above decisions was referred and followed by a Full Bench of this Court in Commissioner of Income Tax Vs. Ruby Rubber Works Ltd., Travancore Rubbers Ltd. and Smt. M. Fathima, . This Court held that the subsidy scheme framed by the Rubber Board was designed to achieve development of the rubber plantation industry on efficient and economic lines. It cannot be held that the replantation subsidy given to rubber growers was to swell the profits of the assessee-growers and, therefore, it was not a revenue receipt assessable under the income tax Act, 1961.

In the present case, while assessing discharges its statutory duties, no profit is contemplated. It is not engaged in a trading activity. Therefore, the subsidy received by the Corporation cannot be treated as ''trade receipt. The subsidy is received by the Corporation to enable it to discharge its statutory duties in public interest. Under these circum-stances, we are not able to accept the contention raised by the learned counsel for the revenue that the principle laid down in the decisions of the Supreme Court in Commissioner of Income Tax, Madras Vs. G.R. Karthikeyan, ; should apply in this case also.

Now, we will consider whether the decision in Kesaria Tea Co. Ltd.''s case (supra), has any application to the facts of the present case. In that case, the assessee, who was carrying on the business of export of tea, received cash assistance from the Government of India. Such cash assistance was given to customers like the assessee in order to help them to carry on export business in a profitable manner. The quantum of the assistant was fixed at 10 percent of the f.o.b. value of instant tea, packet tea and tea bags. The assessing authority held that the cash assistance thus received would be income for the purpose of assessment to income tax. This Court also affirmed the view. It was found that the amount was received during the course of the conduct of the business. The payment of subsidy or cash assistance was directly proportionate to the quantity of the goods exported. Therefore, the amount received by the assessee was supplementary income as it was by way of additional payment for goods exported. That was not a case where the subsidy was given or the assistance was given for a specific or specified purpose. Therefore, this Court took the view that the cash assistant received can be included in the taxable income. The facts of the above case would clearly show that the assessee therein was carrying on a business and the amount received was a trade receipt unlike in the case of the Kerala Land Development Corporation. We, therefore, find that the above decision is of no help to support the contention put forward by the Revenue. Thus, we come to the conclusion that the Tribunal has correctly held that the subsidy received by the assessee-corporation would not partake of the character of a revenue receipt.

We, therefore, answer question No. 1 in the negative, against the Revenue and in favour of the assessee. Question No. 2 is answered in the affirmative, in favour of the assessee and against the Revenue.