M.P. Veener and Plywood P. Ltd. vs Commissioner of Income Tax

S.R. Waghmare, J.—This reference has been received from the Income Tax Appellate Tribunal, Indore in pursuance to the directions issued by this Court in I.T.R. No. 60/2000 dated 04/11/2000 dated 04/11/2004. The Reference is admitted for hearing on the following question referred by the Tribunal:--

"Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the special investment subsidy of Rs. 3,49,750/- received by the assessee from the state govt. for employing persons belonging to scheduled caste and scheduled tribe categories of M.P. State at its industrial unit, established in the selected backward districts of Madhya Pradesh, was not in the nature of capital receipt in view of the judgment of the Apex 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, AIR 1997 SC 3968 : (1997) 142 CTR 261 : (1997) 72 ECR 787 : (1997) 228 ITR 253 : (1997) 8 JT 173 : (1997) 6 SCALE 175 : (1997) 7 SCC 764 : (1997) 4 SCR 189 Supp : (1997) 94 TAXMAN 368 ."

Facts of the case in a nutshell are that the previous year the assessee had received a special investment subsidy of Rs. 3,49,750/- from the state government to the extent of 5% of the fixed capital investment made by it of Rs. 67,95,000/- as on 5/4/81 i.e. up to the date of starting of its production. The scheme was announced by the M.P. Government for the establishment of industrial units in district/area to encourage the industrial units to give more job opportunities to the persons belonging to the scheduled caste and scheduled tribes and which had started production in specific areas/districts after 01/4/1981 and terms and conditions were mentioned in the scheme pertaining to the employees for the requirement of scheduled caste and scheduled tribes, who were bonafide residents of the Madhya Pradesh. The petitioners were granted subsidy sanctioned by M.P. Audyogik Vikas Nigam Ltd. dated 7/4/1986 along with special state investment subsidy agreement of January, 1987 (enclosed and marked as Annexure-1, Annexure-II and Annexure-III respectively) which give in detail the conditions for grant of the said subsidy. However, the appellant company filed its return of income on 27/6/1988 declaring a loss of Rs. 12,06,393/-. The depreciation amount was Rs. 10,93,511/-. The company had received subsidy of Rs. 3,49,750/- for employing scheduled caste and scheduled tribes candidates, which was not offered as income for assessment, but the Assessment Officer treated the same as a revenue receipt. The assessment order has been enclosed and marked as Annexure-IV. The A.O. held thus:--

"The decision of the Dusad Industries is in respect of Sales-tax subsidy and not the subsidy of the nature received by the assessee. Therefore, the assessee''s submissions based on CBDT Circular and the decision of MP High Court are not acceptable. In any case the amount of Rs. 3,49,750/- received by the assessee for employing SC/ST candidates is not of a capital nature. Penalty proceedings u/s. 271(1)(c) are initiated separately. I would, therefore, treat the said subsidy as a revenue receipt in the hands of the assessee and it will be included in the total income of the assessee for tax purposes as the same is neither a capital receipt nor a exempted receipt under any provisions of law."

And hence, the appellant has filed an appeal before the CIT(A) who considered the case of Commissioner of Income Tax Vs. Dusad Industries, (1986) 51 CTR 217 : (1986) 162 ITR 784 : (1986) 27 TAXMAN 4 whereby the Court had held thus :

"Held, that as the subsidy was given on the basis of a particular scheme for a specified period, in respect of industries situated only in backward areas, the same was given by way of an incentive for capital investment and not by way of addition to the profits of the assessee. Therefore, the sales tax subsidies received by the assessee were not assessable to tax as revenue receipts."

The C.I.T (A) also in particular relying on the decision of Commissioner of Income Tax Vs. Ruby Rubber Works Ltd., Travancore Rubbers Ltd. and Smt. M. Fathima, (1990) 2 ILR (Ker) 462 : (1989) 178 ITR 181 agreed to the contention of the assessee that such subsidy was not taxable. The Court held thus:--

"I find myself quite unable to see that it was a trade receipt, or that it bore any resemblance to a trade receipt. It appears to me to have been simply a grant made by the Government for the purpose which I have mentioned, and in those circumstances cannot be included in revenue for the purpose of tax."

We find that in the matter of Dusad Industries (supra) as well as Bhandari Capacitors Pvt. Ltd.(July 15, 1987 ITR 647) the nature of the subsidy was directed to be considered for the purpose of levying tax in the cases decided in the year 1985 and 1987, whereas the question has been set at rest by the Apex Court itself in the year 1997 in the matter of Sahney Steel and Press Works Ltd. and others v. Commissioner of Income Tax: 1997 ITR Vol 228 254 and the Apex Court held thus:--

"If payments in the nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are trade receipts. The character of the subsidy in the hands of the recipient and whether revenue or capital will have to be determined, having regard to the purpose for which the subsidy is given. The source of the fund is quite immaterial. However, if the purpose is to help the assessee to set up its business or complete a project the monies must be treated as having been received for capital purposes. But if monies are given to the assessee for assisting him in carrying out the business operations and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade."

It further held that:

"Held, dismissing the appeal, that, under the notification in question the payments were made to assist the new industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. It was true that the assessee could not use this money for distribution as dividend to its shareholders. But the assessee was free to use the money in its business entire as it liked and was not obliged to spend the money for a particular purpose. The subsidies had not been granted for production of, or bringing into existence any new asset. The subsidies were granted year after year, only after the setting up of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee. The subsidies were of revenue nature and would have to be taxed accordingly."

And the case pertains to grant of subsidy given in each case to industries for expansion if they were located in a city or town of the panchayat area. And the case of Dusad Industries (Supra) was also considered by the Apex Court and it distinguished the case thus:--

"The Madhya Pradesh High Court, however, failed to notice the significant fact that under the scheme framed by the Government, no subsidy was given until the time production was actually commenced. Mere setting up of the industry did not qualify an industrialist for getting any subsidy. The subsidy was given as help not for the setting up of the industry which was already there but as an assistance after the industry commenced production. The view taken by the Madhya Pradesh High Court is erroneous."

And hence, this Court has no hesitation in holding that the subsidy in the hands of the assessee in the present case M/s. Veener and Plywood P. Ltd. are of revenue in nature and would be liable to tax accordingly. The Apex Court decision was passed in the year 1997 still holds the field and there is no valid reason urged to deviate from the ratio laid down by the Apex Court.

The Reference has accordingly been answered in the affirmative. A copy of this judgment be sent to Income Tax Appellate Tribunal, Indore for compliance.