Commissioner of Income Tax vs Vispro Foundry Engineers (P.) Ltd.

N.V. Balasubramanian, J.—The assessee is a company manufacturing tappets, cam shafts, etc. The assessee, during the previous year

relevant to the assessment year 1978-79, obtained a refund of a sum of Rs. 1,23,300 and also a sum of Rs. 1,76,873 from the Tamil Nadu State

Electricity Board relating to the period commencing from February 1, 1975, to September 30, 1975, totalling in all a sum of Rs. 3,00,173. Out of

the said sum of Rs. 3,00,173, a sum of Rs. 2,32,794 related to the earlier accounting years and the balance of Rs. 67,379 related to the

accounting year ending on December 31, 1977, relevant to the assessment year 1978-79. The assessee got the refund as a concessional rate of

levy was extended to the industrial undertaking of the assessee on the ground that it was a small scale industry. In the statement filed by the

assessee along with its return of income for the assessment year 1978-79, the assessee offered the sum of Rs. 2,32,794 being the refund of

electricity charges relating to the earlier assessment years. As regards the balance of Rs. 67,379, it was found that the normal charges towards the

consumption of electricity payable at the ordinary tariff rate was Rs. 3,26,828 and after adjusting the refund of Rs. 67,379 and the concessional

rate enjoyed for the period from October to December, 1977, amounting to Rs. 8,676, the balance of Rs. 2,50,773 was debited as electricity

charges for the current year. In the adjustment statement, the assessee claimed that the sum of Rs. 2,32,794 was not a revenue receipt but was

only a capital receipt. The assessee also claimed that the sum of Rs. 67,379 was also a capital receipt. The Income Tax Officer did not accept the

claim of the assessee and held that the sums received by the assessee represented the refund of the excess amount paid by it towards electricity

charges which was allowed as a deduction in the computation of income for earlier assessment years and the refunded amount was its income

under the provisions of section 41(1) of the Income Tax Act, 1961 (hereinafter to be referred to as ""the Act""). The Commissioner of Income Tax

(Appeals) confirmed the order of the Income Tax Officer and dismissed the appeal preferred by the assessee.

The assessee carried the matter in appeal to the Income Tax Appellate Tribunal and the Appellate Tribunal held that the assessee had received

the amount on the basis of the circulars issued by the State Industries Promotion Corporation of Tamil Nadu Limited (SIPCOT) and according"" to

the Tribunal, instead of the Government paying directly to the assessee the money, the Government devised a scheme to implement the grant which

allowed the assessee to retain a certain portion of the money with it which represented the difference between the amount payable under the

normal rate of electricity and the concessional tariff rates. The Tribunal, therefore, held that the assessee paid the normal tariff during the relevant

period and the Government had to pay the subsidy in cash and instead of paying the amount directly, it routed the same through the Electricity

Board which adopted the form and language of refund of a portion of the normal tariff. The Tribunal held that there was no cessation of liability

because of the receipt of the money from the Electricity Board and that the payment received represented cash subsidy and it cannot be regarded

as a payment u/s 41(1) of the Act. The Tribunal was also of the view that the amount received is a capital receipt and held that the refund of excess

electricity charges was not liable to be treated as the income of the assessee.

Aggrieved by the order of the Income Tax Appellate Tribunal, the Revenue obtained a statement of case on the following two questions of law

for our consideration u/s 256(1) of the Act :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the refund of Rs. 3,00,173 received

by the assessee from the State Electricity Board being the excess charges collected from the assessee is not to be treated as income u/s 41(1) of

the Income Tax Act, 1961 ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal''s view that the amount received by the assessee from the

State Electricity Board is subsidy of capital nature and not receipt falling u/s 41(1) of the Income Tax Act, 1961, is based on valid and relevant

material and is sustainable in law ?

Learned counsel for the Revenue submitted that the Government paid the subsidy to the assessee and it was paid after the commencement of

the business of the assessee with an avowed object to help the assessee to carry on its business and the amount was not paid by the Government

for setting up an industrial undertaking. Learned counsel for the Revenue placing reliance on the decision of the Supreme Court in the case of M/s.

Sahney Steel and Press Works Ltd., Hyderabad etc. etc. Vs. Commissioner of Income Tax, Andhra Pradesh-I, Hyderabad, and the decision of

the Andhra Pradesh High Court in the case of Panyam Cements and Mineral Industries Ltd. Vs. Addl. Commissioner of Income Tax, submitted

that the amount received was a revenue receipt and he also submitted that the amounts received are taxable as income u/s 41(1) of the Act.

Notice was served on the assessee and there is no representation on behalf of the assessee before us.

We have carefully considered the submissions of learned counsel for the Revenue. In our opinion, the amount received by the assessee consists

of two portions. As far as the sum of Rs. 2,32,794 representing the remission of electricity charges relating to earlier accounting years is

concerned, we are of the opinion that it is liable to be treated as income of the assessee u/s 41(1) of the Act. The essential conditions for

applicability of Section 41(1) of the Act are that the amount should have been allowed as a deduction in the computation of income for an earlier

assessment year and there was a remission of the liability in the subsequent assessment year. It is seen that the amount of electricity charges paid by

the assessee was granted as a deduction in the computation of the business income in its earlier assessment years and the assessee during the

previous year relevant to the assessment year in question, received the amount as reimbursement of the expenditure incurred by way of remission

or cessation of its liability. It is incorrect to state that there was no remission of its liability by the payment of the amount by the Tamil Nadu

Electricity Board. The assessee had earlier incurred its liability for its electricity consumption towards the State Electricity Board at a certain

percentage of the tariff rate and the Board by granting the concessional rate had forgone its right to receive the difference between the normal and

the concessional rate of levy and to that extent there was a cessation or remission of the assessee''s liability. The assessee made the electricity

payment in discharge of its liability to the Electricity Board in the earlier years and when the electricity tariff rate was reduced and the assessee was

given the concessional rate, in our opinion, there was, to that extent, a cessation or remission of its trading liability. Therefore, the amount received

by the assessee, even assuming that it was a capital receipt, is liable to be taxed under the provisions of Section 41(1) of the Act. The view of the

Appellate Tribunal that there was no cessation of the liability and the amount received by the assessee cannot be regarded as payment u/s 41(1) of

the Act is not legally sustainable as the mere nomenclature given for the payment, though styled subsidy, is not conclusive and the real nature of the

transaction has to be seen. In our view, by this process, there is a cessation of the assessee''s liability towards the Tamil Nadu Electricity Board

and the provisions of Section 41(1) of the Act are wide enough to catch the receipt of the amounts in question by the assessee.

We are of the opinion that for considering the question of applicability of the provisions of Section 41(1) of the Act, the motive of the Tamil

Nadu Government or the State Electricity Board or the objective behind the payment is not of much importance and the only relevant question that

has to be examined is whether by the grant of the concessional rate of electricity, the assessee was relieved of its liability to pay the electricity

charges at the normal rate that was in force during the years in question. The question can also be viewed from a different angle. The assessee

would not have paid the electricity charges at the normal rate, had the scheme granting concessional levy of rate been in force at the time of

payment and the assessee would have paid electricity charges at the concessional rate. We hold that because the concession was later extended to

the rate of levy would make no difference as regards its ultimate liability of the assessee towards its electricity charges and its liability was only to

the extent to which it was liable to pay on the basis of the concession scheme applicable and it was nothing more or nothing less. We hold that all

the requirements of Section 41(1) of the Act are fully satisfied to treat the refund amount as the income of the assessee and, hence, the Tribunal

was not justified in holding that it is not a payment falling u/s 41(1) of the Act. We, therefore, hold the assessment of the sum of Rs. 2,32,794 as

income of the assessee by the Income Tax Officer invoking the provisions of Section 41(1) of the Act is quite justified and calls for no interference.

In so far as the remaining amount representing the remission of the electricity charges for the current year, namely, the sum of Rs. 67,379 is

concerned, a doubt has arisen whether the sum was allowed as a deduction in the computation of income of the assessee for the assessment year

in question. It is seen from the statement of the case that the assessee had adjusted the refund of Rs. 67,379 and debited the balance of Rs.

2,50,773 as electricity charges for the current year which means that the assessee did not claim deduction of the sum and was not allowed the

deduction of the said sum. Therefore, the requisite conditions for the applicability of Section 41(1) of the Act are not satisfied as there was no

deduction granted by the Income Tax Officer in the determination of the income of the assessee.

Learned counsel for the Revenue submitted that in any event the amount would represent the subsidy and, therefore, it is an income for the

purpose of the Act. Learned counsel for the Revenue relied upon a decision of the Supreme Court in the case of M/s. Sahney Steel and Press

Works Ltd., Hyderabad etc. etc. Vs. Commissioner of Income Tax, Andhra Pradesh-I, Hyderabad, and the decision of the Andhra Pradesh High

Court in Panyam Cements and Mineral Industries Ltd. Vs. Addl. Commissioner of Income Tax, . In our view, the decisions relied upon by learned

counsel for the Revenue are not applicable to the facts of the case. It is seen that in the two cases relied on by learned counsel, the subsidy was

granted by way of grant given by the Government, and in that context, the question arose whether the amount received was liable to be treated as

income of the assessee for the purpose of the Act. However, on the facts of the case, the amount received by the assessee was only a refund of

the electricity charges paid by the assessee by way of concessional tariff extended by the Tamil Nadu Government. When the Government desired

to extend concessional tariff to a small scale industrial undertaking, it cannot be said that there was a grant or subsidy given by the Government.

We are of the view that the amount received by the assessee represented the refund of the electricity charges already paid by it and the amount

received cannot be regarded as subsidy at all. The subsidy, in our opinion, is granted by the Government in many forms. At times, it may be an

outright grant ; sometimes, it may be by way of concession. The question whether the subsidy is taxable or not would depend on the facts of the

case. In the decisions decided by the apex court as well as by the Andhra Pradesh High Court, there was an outright grant of subsidy. The

Government may grant subsidy in the form of subsidised price and in those cases, it cannot be held that the difference between the market value of

the commodity and subsidised price would represent the assessee''s income. Applying the principle, the Government provided the concessional

rate of electricity to the small scale industries in the State with a view to promote the industrialisation in the State and on that account, it cannot be

held that the difference in the amount between the normal value and the subsidised rate of electricity was the amount received by the assessee as

subsidy and is liable to be taxed as income under the provisions of the Act. Further, the amount received was not given as deduction in the

computation of income of the assessee and the provisions of Section 41(1) of the Act are not applicable and the sum of Rs. 67,379 is not liable to

be treated as income of the assessee. We, therefore, hold that in so far as the sum of Rs. 67,379 is concerned, it cannot be treated as the income

of the assessee for the purpose of the Income Tax Act.

Accordingly, we hold that in so far as the assessment of the refund of the sum of Rs. 2,32,794 received by the assessee from the Electricity

Board is concerned, it was rightly treated as income u/s 41(1) of the Act but the sum of Rs. 67,379 is not its income for the purpose of the Income

Tax Act. Accordingly, we answer the questions of law referred to us in the manner indicated above. However, in the circumstances of the case,

there will be no order as to costs.