Commissioner of Income Tax vs Reliance Industries Ltd.

The Revenue is in appeal on the following substantial questions of law:

(A) Whether, on the facts and in the circumstance of the case and in law, the hon''ble Tribunal was right in holding that expenditure for earning dividend income cannot be estimated and, therefore, cannot be disallowed (?) while computing book profits and also under the normal provisions of the income tax Act?

(B) Whether, on the facts and in the circumstance of the case and in law, the hon''ble Tribunal was right in deleting the disallowance made by the Assessing Officer of payments made by the assessee-company towards provident fund and superannuation fund relating to the assessment year 1997-98 that were claimed by the assessee in 1998-99 u/s 43B of the income tax Act?

(C) Whether, on the facts and in the circumstance of the case and in law, the hon''ble Tribunal was right in allowing (?) u/s 43B of the income tax Act the unpaid customs duty and excise duty including in the closing stock?

(D) Whether, on the facts and in the circumstance of the case and in law, the hon''ble Tribunal was right in holding that sales tax incentive is a capital receipt?

(E) Whether, on the facts and in the circumstance of the case and in law, the hon''ble Tribunal was; right in confirming the direction given by the Commissioner of income tax (Appeals) to the Assessing Officer to allow, for the purpose of computation of book profits u/s 115JA of the income tax Act, the deduction u/s 80HHC on the basis of profits and gains as computed under Chapter IV of the income tax Act and not on the basis of book profit u/s 115JA?

(F) Whether, on the facts and in the circumstance of the case and in law, the hon''ble Tribunal was right in holding that pre-operative expenses and trial run expenses that have been capitalised in the books of account of the assessee-company is revenue expenditure?

So far as question (A) is concerned, the Commissioner of income tax (Appeals) held that certain administrative expenses are required to be incurred to keep track of receipt and accruals of dividend income and accordingly, it is not possible to accept that no expenditure has been incurred out of the dividend income. Accordingly, he held that the expenses of Rs. 20 lakhs is sufficient to meet the expenses. The income tax Appellate Tribunal, in appeal observed that : "The assessee has earned dividend income only from three companies. There is no fact of having incurred any expenditure for the purpose of earning the dividend income. The disallowance, in our view, is misconceived and the same is deleted in the light of the same order." In our opinion, this is purely a finding of fact and, therefore, question (A) as framed would not arise.

So far as question (C) is concerned, the same is answered by the judgment of the Supreme Court in the case of Berger Paints India Ltd. Vs. Commissioner of Income Tax, Calcutta, . Question (C), therefore, would not arise.

So far as question (D) is concerned, the Tribunal relied upon the income tax Appellate Tribunal Mumbai Bench "J" (Special Bench) decision in the case of assessee itself in (2004) 88 ITD 273 . We may gainfully reproduce the following portion (page 50):

The scheme framed by the Government of Maharashtra in 1979 and formulated by its resolution dated January 5, 1980, has been analysed in detail by the Tribunal in its order in RIL for the assessment year 1985-86 which we have already referred to in extenso. On an analysis of the scheme, the Tribunal has come to the conclusion that the thrust of the scheme is that the assessee would become entitled for the sales tax incentive even before the commencement of the production which implies that the object of the incentive is to fund a part of the cost of the setting up of the factory in the notified backward area. The Tribunal has, at more than one place, stated that the thrust of the Maharashtra scheme was the industrial development of the backward districts as well as generation of employment thus establishing a direct nexus with the investment in fixed capital assets. It has been found that the entitlement of the industrial unit to claim eligibility for the incentive arose even while the industry was in the process of being set up. According to the Tribunal, the scheme was oriented towards and was subservient to the investment in fixed capital assets. The sales tax incentive was envisaged only as an alternative to the cash disbursement and by its very nature was to be available only after production commenced. Thus, in effect, it was held by the Tribunal that the subsidy in the form of sales tax incentive was not given to the assessee for assisting it in carrying out the business operations. The object of the subsidy was to encourage the setting up of industries in the backward area.

Thus, it can clearly be seen that a finding has been recorded that the object of the subsidy was to encourage the setting up of industries in the backward area by generating employment therein. In our opinion, in answering the issue, the test as laid down by the Supreme Court in Commissioner of Income Tax, Madras Vs. Ponni Sugars and Chemicals Ltd., will have to be considered. The Supreme Court has held that the test of the character of the receipt of a subsidy in the hands of the assessee under a scheme has to be determined with respect to the purpose for which the subsidy is granted. The court further observed that in such cases, what has to be applied is the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. Form of subsidy is material. The court then proceeded to observe as under (page 400):

The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account.

Therefore, let us apply the purpose test based on the findings recorded by the Special Bench. The object of the subsidy was to set up a new unit in a backward area to generate employment. In our opinion, the subsidy is clearly on capital account. In that view of the matter, Question (D) as framed, would also not arise. In the light of the above, appeal is admitted only on questions (B), (E) and (F).