Commissioner of Income Tax vs Ponni Sugars and Chemicals Ltd.

R. Jayasimha Babu, J.—The two questions referred to us for our consideration, at the instance of the Revenue are:-

Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that depreciation on guest house should not be

disallowed u/s 37(4) of the Act?

Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the incentives given by the Government in

the form of higher free sale quota of sugar towards excise duty and purchase tax should be treated as capital receipt and hence no tax was exigible

thereon?

The Assessment Year is 1989-90.

We may take the second question first. It is submitted by the learned Senior Counsel for the assessee Mr. V. Ramachandran, that a similar

question has already been considered and answered against the Revenue in two decisions of this Court as also in the decision of the Calcutta High

Court in the case of Commissioner of Income Tax Vs. Balarampur Chini Mills Ltd., , decided on 30th of March, 1999. The two decisions of this

Court relied on by the counsel were rendered in T.C. Nos. 777 and 778 of 1995, decided on 11th September, 2001 and T.C. Nos. 582 and 583

of 1995, decided on 15.10.2001.

The scheme under consideration here is one for providing for incentives to new sugar factories licensed during the sixth five year plan period and

expansion of existing units. That scheme is a revised scheme which had been preceded by the scheme of 1980 and which scheme in turn had been

preceded by the scheme of the year 1975, all of which had been framed with the object of augmenting indigenous sugar production and to provide

incentives to new sugar factories and expansion projects.

In the scheme formulated in the year 1980, which offers incentives which are similar to that in the revised scheme of the year 1987 except for

the difference in the amount of capital invested and number of years for which the incentives are to be enjoyed, it is stated that the scheme is meant

for ensuring that the new factories and expansion projects should, over a period of a specified number of years from the date of commencement of

production/completion of expansion, be compensated for the shortfall likely to be incurred on account of the burden imposed by the higher capital

cost. The scheme of the year 1987 referring to the earlier schemes, states that ""the scheme enabled sugar factories to become viable by utilising the

additional funds generated through such incentives for repayment of loans advanced to them by Central Financial Institutions"". It also notes that ""the

scheme of 1987 was being formulated on the request of the Central Financial Institutions to review the 1980 scheme due to the changes in the

parameters governing it"".

The incentives conferred under that scheme are twofold. First, in the nature of a higher free sale sugar quota and second, in allowing the

manufacturer to collect the excise duty on the sale price of the free sale sugar in excess of the normal quota, but to pay to the Government only the

excise duty payable on the price of levy sugar. The period for which the sugar mill was to enjoy that benefit depended upon the location in the high,

medium or low recovery areas and the duration for which the benefit could be enjoyed varied from five to ten years depending on the location.

Clause 7 of that scheme is material and that clause reads thus:-

The beneficiaries of the incentive scheme shall ensure that the surplus funds generated through sale of the incentive sugar are utilised for the

repayment of term loans, if any, outstanding from the Central Financial Institutions. The sugar factories should submit utilisation certificates annually

from a Chartered/Cost Accountant, holding certificate of practice. Utilisation certificate in respect of each sugar season during the incentive period

should be furnished on or before the 31st December of the succeeding year. Failure to submit utilisation certificate within the stipulated time may

result not only in the termination of release of incentive free sale quota, but also in the recovery of the incentive free sale releases already made, by

resorting to adjustment from the free sale releases of future years"".

Thus, it was vital for the sugar mills seeking the benefit of the scheme, to utilise the amount accrued to them by way of incentives provided under

the scheme exclusively for the purpose of repayment of the loans borrowed from public financial institutions. A certificate from a Chartered

Accountant or a Cost Accountant was required to be produced in respect of each sugar season to show that the monies had been so utilised.

Failure to submit such certificates would result in penalties being imposed by way of termination of release of incentive free sale quota and also

recovery of the incentive free sale release already made by resorting to adjustment from the free sale releases of future years.

The judgment of the Calcutta High Court Commissioner of Income Tax Vs. Balarampur Chini Mills Ltd., interpreting the scheme of the year

1980, wherein it was held that the amount of the incentive so accrued to the mill did not constitute a trading receipt, but was a revenue receipt, has

apparently been accepted by the Revenue. It is apparently on the basis of that judgment that counsel had made submissions before this Court in the

decisions of this Court referred to earlier but by referring to the decision rendered by the Supreme Court in the case of The K.C.P. Limited Vs.

Commissioner of Income Tax, Bangalore, , wherein it had inter alia been observed that in a case where the receipt of the amount by the assessee

was clearly associated with a liability to refund the amount, which liability was ascertainable and quantified, such receipt would not constitute a

trading receipt.

Mr. Ramanujam, learned Senior Standing Counsel for the Revenue, however, submitted that the decisions relied on for the assessee are

erroneous. His submission was that any incentive or subsidy received by an assessee after the commencement of the production has the character

of trading receipt; that the character of the receipt is determined at the time of it''s accrual and that subsequent application would not make any

difference to any of those receipts. Counsel in this context referred to the decision of the Apex Court in the case of Tuticorin Alkali Chemicals and

Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, and M/s. Sahney Steel and Press Works Ltd., Hyderabad etc. etc. Vs.

Commissioner of Income Tax, Andhra Pradesh-I, Hyderabad, . Reference was also made to the decisions of the Calcutta High Court in the cases

of Jeewanlal (1929) Ltd. Vs. Commissioner of Income Tax, and Jeewanlal (1929) Ltd. Vs. Commissioner of Income Tax, .

In the scheme which provides for incentive here, it has been set out that the scheme was intended to compensate the assessees establishing new

sugar mills or expanding existing ones, for the shortfall likely to be incurred on account of the burden to be incurred on the higher capital costs.

That in fact is the true object of the scheme. It is this object that must be kept in mind while deciding the character of the incentive received by the

assessee. The scheme was one which had been made known to those intending to set up new units as also those intending to expand their existing

ones. A promise was held out to them under the scheme that a part of the capital cost which they will have to incur would be defrayed by the

incentives which they were promised would be allowed to them, after they commence production. The fact that the cost had to be initially met by

borrowings from the financial institutions was only to reduce the burden of the Government, which burden would have been considerable, had the

Government itself undertaken to pay those amounts directly to every new unit or a unit engaged in expansion, either by way of an outright grant or

by way of a loan. The device adopted by the Government to enable the assessee to receive the incentive after commencement of production, and

to apply that amount of incentive to discharge the loans made available to it through public financial institutions, was wholly intended to meet the

capital cost incurred by the assessee in setting up the unit. The intention of the Government was not to provide the assessee with additional

disposable sums to be disposed of in the manner of its liking after commencement of production, but to place in the hands of the assessee the

means to meet a part of the capital cost, which the assessee had been enabled to meet by securing loans from public financial institutions.

The nature of the receipt of the incentive, therefore, has to be examined in the light of that object. Law has to keep up with the newer devices

and methods adopted in the world of business as also in the several schemes that policy makers draw up from time to time to ensure the desired

development in the different sectors of industry. If the Government found it convenient to adopt a policy of enabling the entrepreneurs to initially

fund the capital cost of the project by obtaining loans from the public financial institutions by inducing the entrepreneur and the lender institution to

rely upon the incentives provided under the scheme for discharging such loans, it cannot be said that the incentive given being post production,

though meant exclusively for meeting the capital cost, the amount of the incentive would be a trading receipt in the hands of the recipient. The fact

that the time of payment is subsequent to the commencement of production would not in the larger perspective make a difference. As observed by

the Supreme Court in the case of The K.C.P. Limited Vs. Commissioner of Income Tax, Bangalore, , it is not the name given by the assessee or

even the Revenue or anyone else that matters, but it is the true character of the receipt that determines its taxability and being regarded as falling

within the capital field or out of it.

If the true character of the incentive here is to enable the assessee to meet the capital cost, then that true character must be given full

recognition and the fact that the receipt was subsequent to the commencement of production not be allowed to stand in the way of it''s proper

treatment as a receipt in the capital field meant to meet a capital cost. The line separating ""capital"" from ""revenue"" is a line which is not fixed and

unalterable, but one which shifts from time to time depending upon the peculiar facts of a given case. It is the sum total of all the relevant facts of a

given case, which will determine the ultimate decision as to whether a particular item of receipt or expenditure is to be regarded as being in the

capital field or in the revenue field.

The assessee has produced ample material to show that the monies accrued to it by way of incentives are in fact properly applied for the

purpose of discharging the term loans obtained by it in accordance with the terms of the loan agreement. The assessing officer and other authorities

have also not found that any part of the incentives accrued in favour of the assessee has not been used for the purpose of discharging those loans

which had admittedly been obtained for purchasing capital equipment without which the industry could not have been established.

The purpose and object of the scheme, therefore, is of vital significance and decided cases which turn upon the special facts cannot pre-

determine the outcome of another case merely on the ground that post production receipts are normally regarded as trading receipts.

In the case of M/s. Sahney Steel and Press Works Ltd., Hyderabad etc. etc. Vs. Commissioner of Income Tax, Andhra Pradesh-I,

Hyderabad, the Court in the context of the facts before it which did not show that there was any compulsion on the assessee which had received

the subsidy to apply that amount for a specific purpose, or, within any specified time frame, held that the monies which the assessee had received

therein was for the purpose of operating the business or running the same and was not a receipt which could be regarded as falling within the

capital field. After considering the scheme before it, the Court noted that the scheme was not to make any payment directly or indirectly for the

setting up of the industries.

The Court clearly recognised the possibility of the payments being made not directly but indirectly for the setting up of the industries. As the

payments in that case had been made post-production and was in no way linked to the steps that had been taken by the assessee therein in setting

up the industry, it was observed that the incentives had been given only after production had commenced. Such receipts were held to be taxable.

In the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., Madras Vs. Commissioner of Income Tax, Madras, the apex Court held that

interest received by an assessee from the borrowed funds invested in short term deposits in Bank, at a time when the factory was in the process of

being set up and production had not commenced, was a revenue receipt. The Court rejected the assessee''s claim that such interest should go to

reduce the interest payable by the assessee on the term loans secured by the assessee from financial institutions which would be capitalised after

the commencement of commercial productions. The Court, thus, did not regard the commencement of commercial production as the dividing line

for determining whether the true character of a receipt is capital or revenue.

In the cases of Jeewanlal (1929) Ltd. Vs. Commissioner of Income Tax, and Jeewanlal (1929) Ltd. Vs. Commissioner of Income Tax, it was

held by the Calcutta High Court that import entitlements and cash assistance received by an exporter in terms of a scheme framed by the

Government for encouraging exports is connected with the act of exportation and are to be treated as trading receipts. The scheme considered in

those cases was not similar to the one before us.

The reference to the production having commenced, is not therefore to be regarded as constituting a rigid and inflexible line which separates

the ""capital receipt"" from a ""revenue receipt"". The incentive in the scheme under consideration here, which provides for indirect assistance in the

setting up of the industry, by enabling the assessee to acquire through the incentives given solely for the purpose of repayment of term loans, the

means to discharge the loan obtained from public financial institutions for acquiring the capital assets, is capable of being regarded as an indirect

assistance provided for the setting up of the industries to the extent the incentive so given is used to discharge the term loans.

The question referred also refers to the purchase tax benefit enjoyed by the assessee. So far as this concession extended by the State

Government is concerned, it was in no way linked to the expenditure incurred in setting up the industry. The very terms of the concession would

show that it was a concession given to meet the cost of running the business after it had gone into the production. No obligation was cast on the

assessee to apply the subsidy equivalent to the quantum of the purchase tax for the period for which it was given for any particular purpose. That

amount was available to the assessee for being applied in such manner as it desired, without having to account for the same to the State

Government.

Our answer to the second question, therefore, in so far as the incentive given by the Central Government in the form of higher free sale quota

of sugar and the excise duty are concerned is in favour of the assessee. In so far as the subsidy linked to the purchase tax extended by the State

Government is concerned the answer is in favour of the Revenue and against the assessee.

Coming to the first question, Section 37(4) of the Income Tax Act, as it stood in the relevant assessment year, reads thus:-

....

(4) Notwithstanding anything contained in sub-section (1) or sub-section (3):-

(i) no allowance shall be made in respect of any expenditure incurred by the assessee after the 28th day of February, 1970, on the maintenance of

any residential accommodation in the nature of a guest house (such residential accommodation being hereinafter in this sub-section referred to as

guest house"").

(ii) in relation to the assessment year commencing on the first day of April, 1971, or any subsequent assessment year, no allowance shall be made

in respect of depreciation of any building used as a guest house or depreciation of any assets in a guest house.

Sub-clause (ii) under Clause (4) is unambiguous and does not admit of any doubt. It clearly denies to the assessee any depreciation on and after

1st April 1971 for any building used as guest house as also for the assets therein. Despite such clear language in that provision, it was submitted by

the learned counsel for the assessee that depreciation is nevertheless allowable as the opening part of Section 37(4) does not in its non obstante

clause exclude the application of Section 32, but only provides for overriding sub-sections (1) and (3) of Section 37.

Counsel placed reliance on the case of Commissioner of Income Tax Vs. Chase Bright Steel Ltd. (No. 1), . It dealt with Section 37(3). That

decision was relied upon and applied to Sec. 37(4) in the case of Century Spinning and Manufacturing Co. Ltd. Vs. Commissioner of Income Tax,

. It was held therein that having regard to the reference to sub-sections (1) and (3) only in Section 37(4), if an expenditure is allowable under other

sections of the Income Tax Act, allowance should not be withdrawn or denied because of the prohibitory provisions of Section 37(4). With great

respect we are unable to agree.

Chapter IV, Section D of the Income Tax Act, 1961 is titled ''Profits and gains of business or profession''. Section 28 sets out the types of

income which shall be chargeable to tax under that head. Section 29 states that the income referred to in Section 28 shall be computed in

accordance with the provisions contained in Section 30 to Section 43D. Section 32 deals with depreciation. Section 37 is titled as ''General''. Sub-

section (1) thereof provides that, ""Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature

of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or

profession shall be allowed in computing the income chargeable under the head ""profits and gains of business or profession"".

Sub-section (3) of Section 37 which was on the statute book from 01.04.1964 to 01.04.1998 limited the expenditure allowable under

advertisement or maintenance of residential accommodation including any accommodation in the nature of a guest house or in connection with the

travelling by an employee or by any other person including hotel expenses, only to the extent and subject to the conditions that may be prescribed.

Sub-section (4) of Section 37 of the Act which was on the statute book from 01.04.1970 till 01.04.1998 in sub-clause(ii) provides that in

relation to the assessment year commencing on the first day of April, 1971, or any subsequent year, ""...no allowance shall be made in respect of

the depreciation of any building used as a guest house or depreciation of any assets in a guest house, provided ...........

Section 37(1) allows expenditure laid out wholly and exclusively for the purpose of the business or profession, if such expenditure is not

personal expenses of the assessee, is not an expenditure of a capital nature, and is not expenditure of the nature described in Sections 30 to 36. A

claim for depreciation cannot, therefore, be made under Sec. 37(1). Sub-section (4) of Section 37 over-rides sub-section (1) of Section 37 as

also sub-section (3) thereof. The object of overriding Section 37(1) inter alia is to make known the legislative intention of dealing in Section 37(4)

with the topic of depreciation which had been dealt with in Section 32 and which section along with other sections 30 to 36 had been excluded

from the scope of Section 37(1). The absence of any reference to Section 32 in section 37(4), therefore, does not imply that the prohibitions

against the grant of depreciation for a building used a guest house or the assets in a guest house, is to be disregarded and such a claim allowed u/s

Any claim for depreciation has necessarily to be made u/s 32 which is the specific provision for depreciation. When such a claim is made, the

prohibition, if any, against the grant of the same, set out in the later provisions of the Act, are not required to be disregarded, but such later

provisions must be given their full effect.

The fact that Section 32 deals with depreciation does not imply that the subject of the depreciation should not be dealt with in any other

provision of the Act. It is open to the legislature to deal with different aspects of the same subject matter in more than one provision in the statute.

Section 32 is not to be regarded as a code with regard to depreciation which is unaffected by what is provided in other provisions with regard to

depreciation. The absence of reference to section 32 in Section 37(4) is not of any materiality, as the legislative intent to deal with depreciation is

clear to the extent that section denies depreciation on the depreciable assets specified therein. The legislative prohibition must be given full effect

and not defeated in it''s entirety by allowing what is prohibited u/s 37(4), u/s 32 of the Act.

It is well settled that a statute must be read as a whole and all its provisions read harmoniously. The Court should not by a process of

interpretation render the specific provision made in the law otiose and purposeless by allowing what is prohibited under the later special provision

with regard to specified assets by falling back on an earlier general provision with regard to depreciation. As observed by the Apex Court in the

case of Utkal Contractors & Joinery pvt. Ltd. v. State of Orissa ""It is again important to remember that Parliament does not waste it''s breath

unnecessarily. Just as Parliament is not expected to use unnecessary expressions, Parliament is also not expected to express itself unnecessarily"".

With great respect, we are unable to agree with the reasoning set out in the decisions of the Bombay High Court relied upon by counsel for the

assessee.

The first question is answered against the assessee and in favour of the Revenue.