M/S. SHIV SHAKTI FLOUR MILLS PVT. LTD. vs. COMMISSIONER OF INCOME TAX

This appeal is filed under Section 260A of the Income Tax Act, 1961 (her e-in-after referred to as ’the I.T. Act’), against the common order dated 13.12. 2013 (Annexure-G), of the Income Tax Appellate Tribunal, Guwahati. The departmen tal Appeal i.e. ITA No.20/Gau/2005 came to be partially allowed, whereby the tra nsport subsidy was ordered to be treated as revenue receipt, taxable in the hand s of the assessee, on account of the majority opinion of the 3 Member Tribunal.

This appeal is admitted on the following substantial question of law:- Whether on the facts and circumstances of the case, the Tribunal was justified in holding that the transport subsidy received by the assessee during the assess ment year 2001-02 was in the nature of revenue receipt and not capital receipt a nd thus taxable in the hands of the assessee? 

The appellant is a company and is assessed to income tax within the juri sdiction of the Commissioner of Income Tax (CIT), Dibrugarh. On 22.10.2001 they submitted their return of income disclosing total income at Rs.1,82,940/- for th e Assessment Year 2001-02. A non-scrutiny assessment was then made under sub-sec tion (1) of Section 143 of the I.T. Act and the intimation under that provision was issued to the assessee on 12.03.2002, by accepting their return and granting refund.

However the appellant’s case was taken up for scrutiny under sub-section (2) of Section 143 of the I.T. Act and an assessment order was passed on 30.03. 2004 (Annexure-A), whereby the Rs.17,45,750/-, received as transport subsidy, wa s construed to be a supplementary trade receipt and not capital inflow and thus the concerned amount was added to the income of the assessee and accordingly ass essment to tax was made by the Asstt. Commissioner of Income Tax, Circle Tinsuki a on 30.03.2004 (Annexure-A).

The aggrieved assessee then preferred Appeal before the Commissioner of Income Tax (Appeals), where they disputed the inclusion of the transport subsidy sum towards income of the assessee. After due consideration of their contention , the 1st Appellate Authority noted that the transport subsidy received by the a ssessee was under the Transport Subsidy Scheme, 1971 of the Govt. of India and t he purpose of the subsidy was for promotion and growth of industries in the Nort h Eastern Region, which is considered to be a backward and difficult area for de velopment. Thus the nature of the receipt towards transport subsidy was declared to be capital in nature and hence not taxable, through the order dated 27.10.20 14 (Annexure-B).

Aggrieved by the decision of the 1st Appellate Authority, the Revenue ch allenged the order before the Income Tax Appellate Tribunal, where the Judicial Member and the Accountant Member differed in their views. According to the Judic ial Member, the main object of the scheme/industrial policy is to boost industri nds of the assessee, by his order dated 03.07.2012 (Annexure-F).

When the majority members accepted the contention of the Revenue, the Tr ibunal by its impugned order dated 13.12.2013 (Annexure-G), declared that transp ort subsidy is required to be treated as revenue receipt and thus the assessment to tax for the amount received, was upheld for the Assessment Year 2001-02. 10. rowth and development of industries in the North-Eastern States and submits that the transport subsidy sanctioned under the scheme, was intended for generating industrial activity in the backward region in order to offset the deterrent cost for the new entrepreneurs and also for those who wish to expand the production capacity, for the already established industries. He also refers to the Transpor t Subsidy Scheme, 1971 (hereinafter referred to as the Scheme ) notified on 23. 07.1971 to project that scheme was intended to promote growth and expansion of i ndustries in the Northeast region and accordingly the appellant contends that re imbursement of the transportation cost for the permitted extent, is nothing but incentives provided for generation of industrial activity and the same cannot be construed as revenue receipt to augment the profit of the concerned entrepreneu r.

2 The appellant relies on Sahney Steel & Press Works Ltd. Vs. CIT reported in 228 ITR 253 (SC) and also CIT Vs. Ponni Sugars & Chemicals Ltd. reported in 306 ITR 392 (SC) to contend that in order to determine the nature of the receipt ansport subsidy under the scheme applicable for North-East region, was examined by the Apex Court and it was declared that the object of the Transport Subsidy S cheme is not augmentation of revenue but to improve trade and commerce between t he remote parts of the country and also to make it attractive for industrial ent repreneurs, to start and operate industries in remote region, by providing them a level playing field, so that they could compete with their counterparts in the non-remote areas of the country. Thus the receipt of the transport subsidy is s r balance sheet for the assessment year 2001-02, referred to the decision in Dep nt was added to the total income of the assessee for the assessment year 2001-02 and the payable tax was computed on that basis.

However, the Commissioner of Income Tax (Appeals) while deciding the app eal filed by the aggrieved assessee referred to the purpose of the Transport Sub sidy Scheme, 1971 of the Govt. of India and noted that it was intended for promo tion and growth of industries in the North-Eastern States which are considered t o be backward and difficult areas, for development. Proceeding on this basis, th e amount received towards transport subsidy was considered to be a capital recei pt and declaration was thus made that the same is not taxable under the I.T. Act .

The issue was then taken by the revenue before the Income Tax Appellate Tribunal, where different opinion was expressed by the Judicial Member (in favou r of the assessee) and the Accountant Member (in favour of the Revenue) and thus the finality was sought through the opinion of the 3rd Member. The learned Memb er considered the ratio in Sahney Steel & Press Works Ltd. (supra) and in Ponni Sugars & Chemicals Ltd. (supra) and also the decision of the Jammu and Kashmir H igh Court in Shree Balaji Alloys Vs. CIT reported in (2011) 333 ITR 335 (Jammu & eceived under subsidy head, under Section 80-IB or 80-IC of the I.T. Act.

Similar industrial policy and concessions intended for accelerating the growth and development of industries as applicable in the N.E. States region (no tified by the Central Government on 24.12.1997) was also formulated and made app licable in the State of Jammu & Kashmir. For an assessee who received refund of excise duty and interest subsidy in the Jammu & Kashmir State, the issue cropped up whether, such receipt would be treated as capital or revenue receipt, in the hand of the assessee. In order to decide on the character of the receipt, the J ammu & Kashmir High Court applied the purpose test formulated in Sahney Steel & Press Works Ltd. (supra) and Ponni Sugars & Chemicals Ltd. (supra) and noted tha t the object of the assistance under the subsidy scheme was to enable the assess ee, to set up a new unit or to expand the production of an existing unit. It was observed that the scheme was intended for growth of industries and employment, creation of new assets and industrial environment in the State and thus the High Court declared that such sum received under subsidy head, cannot be construed a s operational incentives for the benefit of the assessee alone. The object of th e scheme was to create avenues of employment and to accelerate the industrial de velopment in the State. Thus the concerned receipt was found to be non-taxable, in the hand of the assessee, as revenue receipt. The challenge of the revenue ag ainst the verdict of the Jammu and Kashmir High Court was dismissed by the Supre me Court on 19.04.1996 in Civil Appeal No.10061/2011 by declaring that the issue is covered against the revenue, by the decision in Ponni Sugars & Chemicals Ltd . (supra) and in CIT Vs. Meghalaya Steels Ltd. reported in (2016) 383 ITR 217 (S C), where the purpose test was applied to clinch the issue.

What follows from the above discussion is the relevance and applicabilit y of the purpose test to determine the nature of the receipt towards transport s ubsidy in the hand of the assessee. But before we proceed further with the matte r, the Court has to deal with the contention of the revenue lawyer that the asse ssee cannot apply certain accounting method, in order to treat the received sum as capital receipt by including the amount in the reserve and surplus head, in t he balance sheet. On this point we may benefit by referring to the ratio in Tuti corin Alkali Chemicals & Fertilizers Ltd. Vs. CIT reported in (1997) 227 ITR 172 (SC). Here the Supreme Court considered the accountancy practice and observed t hat when the question is whether a receipt of money is taxable or not or whether certain deduction from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with the accountancy practice. It was thus declared by the Supreme Court that accoun ting practice cannot overwrite the provision of the Income Tax law as the taxati on law does not keep step in the footprints of the accountancy profession. If we apply the ratio of this verdict to the matter in hand, we can be assured that t he question formulated for consideration need not be answered on the basis of th e accounting procedure followed by the assessee but question has to be decided o n the basis of the applicable principles of law.

To determine as to whether the transport subsidy received by the assesse e from the Government is taxable as revenue receipt or not, the purpose of the i ncentive scheme will have to be considered. The Supreme Court in Sahney Steel & Press Works Ltd. (supra) after analyzing the relevant case laws declared that th e character of the receipt in the hands of the assessee has to be determined wit h respect to the purpose for which the subsidy is given or in other words, one h as to apply the purpose test. It was further declared by the Court that the poin t of time at which, the subsidy is paid is not relevant, the source also is imma terial and the form of subsidy has no relevance for determination of the issue. The Court declared that if the object of the subsidy scheme was to enable the as sessee to have a more profitable business, then the receipt is on revenue accoun t. But on the other hand, if the object of the assistance under the subsidy sche me was to enable the assessee to set up a new industrial unit or to expand the e xisting facilities, then the receipt of the subsidy was on capital account. It w as thus held that the object for which the subsidy is given will determine the n

Endorsing the purpose test enunciated in Sahney Steel & Press Works Ltd. (supra), the Apex Court in Ponni Sugars & Chemicals Ltd. (supra) reiterated tha cisions in Sahney Steel & Press Works Ltd. (supra), Ponni Sugars & Chemicals Ltd . (supra), Jai Bhagwan Oil and Flour Mills (supra) and applying the purpose test , we are of the considered opinion that the transport subsidy received by the as sessee during the assessment year 2001-02 is intended to stimulate industrial ac tivity in the backward region, to generate employment opportunities and bring ab out developments in the N.E. States and it is not meant to provide higher profit for the entrepreneur. It is intended to encourage investment in difficult and f ar flung states and the sum received under subsidy head cannot be treated as rev enue receipt. Instead such incentives should be treated as capital receipt and t hus not taxable, in the hands of the assessee. Accordingly the substantial quest ion of law in this appeal is answered against the revenue and in favour of the a ssessee.

With the above declaration, the appeal stands disposed of by leaving the parties to bear their own cost.