INDUSTRIAL ORGANICS AND PHARMACEUTICALS LTD. vs. C I T AND ANR.

This order shall dispose of four appeals bearing ITA Nos.420 to 422 of 2007 and 1 of 2008 as learned counsel for the parties are agreed that common question of law is involved in all the appeals besides one additional issue in ITA No.422 of 2007. However, the facts are being extracted from ITA No.420 of 2007. The delay in refiling the appeals is condoned.

ITA No.420 of 2007 has been preferred by the appellant- assessee under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 27.10.2006, Annexure A.4, passed by the Income Tax Appellate Tribunal, Chandigarh Bench (in short, “the integrity of this document High Court Chandigarh Tribunal”), for the assessment year 1995-96, proposing to raise following substantial question of law:- “Whether in the facts and circumstances of the case, the Sales Tax Subsidy received by the assessee can be considered to be a revenue receipt when the Hon’ble Supreme Court has been pleased to entertain the Special Leave Petition No.21673 of 2006 and has also issued notice regarding stay against the operation of the judgment of this Hon’ble Court reported in CIT vs. Abhishek Industries Limited, (2006) 286 ITR 1?”

In ITA No.422 of 2007, besides the aforesaid substantial question of law, the following additional question has also been claimed:- “Whether in the facts and circumstances of the case, the Hon’ble ITAT was right in disallowing the interest under section 36(1) (iii) of the Income Tax Act on interest free loans granted to sister concern, contrary to the judgment of the Hon’ble Supreme Court in the case of S.A.Builders Limited v. CIT(Appeals) and another, (2007) 288 ITR 1?”

A few facts relevant for the decision of the controversy involved, as narrated in ITA No.420 of 2007, may be noticed. The assessee appellant was initially incorporated as Trident Alco Chem Limited on 29.9.1986 and its name was changed to Industrial Organics and Pharmaceuticals Limited on 5.12.2006. The assessee filed return for the assessment year 1995-96 on 29.11.1995 showing nil income. Thereafter, the return was revised claiming deduction on account of sales tax subsidy as capital receipt and not revenue receipt for an amount of ` 77,27,755/-. The Assessing officer passed order under section 143(3) of the Act disallowing the sales tax subsidy and treating the same as revenue receipt. The other additions made were on account of variance of yield of acetic acid treating ` 14,36,715/- as suppressed sales and disallowance of interest on account of integrity of this document High Court Chandigarh interest free loans given to sister concern to the extent of ` 3,23,617/- and other miscellaneous expenses relating to advertisement, charity, donation and festival expenses. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 14.10.1998, Annexure A.3, the CIT(A) deleted the addition made by the Assessing officer holding that the Assessing Officer could not make such an addition without rejecting the books of account. The disallowance made under section 36(1) (iii) of the Act on account of interest free loans given to sister concern was also deleted. However, the action of the Assessing officer in treating the sale tax subsidy as revenue receipt was upheld. Not feeling satisfied, the assessee filed appeal before the Tribunal. The Tribunal vide order dated 27.10.2006, Annexure A.4, following the decision of this Court in Abhishek Industries's case (supra) held the sales tax subsidy to be revenue receipt. The interest under Section 36(1) (iii) of the Act on account of interest free loans granted to sister concern was disallowed in the appeal relating to assessment year 1996-97 out of which ITA No.422 of 2007 has arisen. Hence the instant appeals by the assessee- appellant.

We have heard learned counsel for the parties and perused the record.

The first issue relates to whether receipt of sales tax subsidy from the State Government was revenue in nature or not. Learned counsel for the appellant-assessee submitted that the Tribunal had decided the issue against the assessee by placing reliance upon Division Bench judgment of this Court in Abhishek Industries’s case (supra). It was urged that the Apex High Court Chandigarh 392 and Sahney Steels & Press Works Limited and others vs. CIT, (1997) 228 ITR 253 adjudicated similar issue and held that for determining the nature of receipt of subsidy, the purpose test is to be applied. In other words, it has been laid down that the purpose for which subsidy has been paid will be the determinative factor for ascertaining the nature of receipt i.e. capital or revenue. The aforesaid decision was followed by this Court in ITA No.679 of 2010, The Commissioner of Income Tax v. Siya Ram Garg HUF, decided on 14.12.2010. On the aforesaid premises, it was urged that since the Tribunal has not dealt with and recorded any finding with regard to the purpose for which the sales tax subsidy had been paid, the matter requires to be remanded to the Tribunal to decide the issue afresh keeping in view the dictum laid down by the Apex Court in Ponni Sugars and Siya Ram Garg’s cases (supra).

On the other hand, learned counsel for the revenue supported the orders passed by the Tribunal.

After hearing learned counsel for the parties, we find that the Apex Court in Ponni Sugars's case (supra) had laid down as under:- “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. In other words, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. If the object of the subsidy is 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 is to enable the assessee to set up a new unit or to expand an existing unit then the receipt of the subsidy would be on capital account. The assessee was a cooperative society running a sugar mill. During the relevant year in question, on integrity of this document High Court Chandigarh account of economic factors, it was not economically viable to run new sugar factories and due to high financial costs, financial institutions did not come forward to advance loans to the entrepreneurs of new sugar factories. The tempo of establishing new sugar factories received a serious set back. A committee appointed by the Government recommended that five possible incentives for making a sugar plant economically viable could be provided for, viz. Capital subsidy, larger percentage of free sale of sugar, higher levy sugar price, allowing rebate on excise duty and remission of purchase tax. Following that report, schemes were formulated giving the following benefits: (i) incentive subsidy available only in new units and to substantially expanded units; (ii) minimum investment for new units and expansion of existing units; (iii) increase in free sugar sale quota. The benefit of the schemes had to be utilised only for repayment of loans. The Department and the High Court had held that the receipts from the Government under the incentive schemes were in the nature of revenue.”

The aforesaid decision was followed by this Court in Siya Ram Garg’s case (supra). Accordingly, the matter is remanded to the Tribunal to pass a fresh order after hearing the parties in view of the decision of the Apex Court in Ponni Sugars's case (supra) in accordance with law.

As regards the second question in ITA No.422 of 2007, learned counsel for the appellant urged that the Hon’ble Apex Court in S.A.Builders’s case (supra) held that the commercial expediency is to be seen for allowing or disallowing the deduction under Section 36(1) (iii) of the Act where interest free loans had been advanced to sister concern. In the present case, since the Tribunal had not decided the issue by recording any finding whether there was commercial expediency or not, the matter requires to be remitted back to the Tribunal to decide this issue also afresh.

In view of the above, the impugned orders passed by the Tribunal dated 27.10.2006, Annexure A.4 in ITA Nos.420, 421, 422 of 2007 and dated 24.4.2007, Annexure A.5 in ITA No.1 of 2008 are set aside and the matter is remanded to the Tribunal to decide the issues afresh after hearing the parties in view of the decisions of the Apex Court in Ponni Sugars and S.A.Builders’s cases (supra) in accordance with law. The appeals stand disposed of. (Ajay Kumar Mittal) Judge May 14, 2014 (Jaspal Singh) ‘gs’ Judge integrity of this document High Court Chandigarh