The Commissioner of Income Tax-III vs. M/s. Sanghi Textiles Limited

4 dt.01.03.1995, with the Assam Government, for taking over and developing a sick paper mill namerg Ashok paper Mills (Assam) Ltd. As part of the revival package, the assessee received Rs.4.6o crores as promoters' contribution from the ^A,ssam Government. In addition, the assessee received Rs.2.3o crores towards margin money for working capital and Rs.10.40 crores towards cash loss for the first two years of operation. The entire paper mill along with buildings and external facilities was handed over to the assessee for restarting and running the unit, the appellant/assessee started its operation by reviving the unit. 3. while so, the Assessing Authority passed assessment orders, dt.29.o3.2ooo, by treating the promoters' contribution of Rs.4.6o crores as a revenue receipt and brought the sEune to tax for the assessment years 1996-9T and l99T_98. 4. Assailing the said assessment order, the respondent/assessee filed appeal before the commissioner of Income Tax(Appeals) (for short 'CIT(A)) in ITA.No.2 Lgg lcc- 1/cIT(A)v (cent.) /2000-01 . The CIT(A) uid.e order dt. 19.03.2001, deleted the addition holding that as the said amount was received. for revivat of a sick unit, it constitutes a capital receipt and. not a J i I I I i

5 revenue receipt and directed the Assessing Authority to treat the same as ce-pital expenditure. 5. Assailing the order of the clr(A), the appellant/Revenue filed an appeal before the learned ITAT in ITA.No3a6lHyd/20Oa, and the Tribunal dismissed the said appeal uide order, dt. 19.06.2009, confirming the orders of the CIT(A). The said order is assailed by the Reventre in the instant appeal. 6. The appeal was admitted to consider the following substantial questions of law: "Whether the amount of contribution receiued bg the respondenf-assessee, uthictt is in the nature of grantl,/incentiue and not referable to ang -fixed capital, is not ltable to tax as reuenue receipt and the order of the Tibt:.nal treating the promoters' contribution amount receiued bg the respondent assessee as a capital receict q.nd not exigible to tax is peruerse in law and. contrary to th.e mqteial on record? We L.ave heard Ms B.Sapna Reddy, learned Senior Standing counsel f<rr Income Tax Department for appellant-Revenue and Sri G.V.Ambeshwar, learned counsel representing M/s M.N. Advocates for respondent-assessee. 8. The basic contention of the learned Senior Standing Counsel for appellzrnt/Revenue is that, there is no evidence to show that 7

6 the amount of Rs.4.60 crores was r:eceived as a loan or as a grant- in-aid earmarked for capitar investment and no covenants in the Mou or the agreement showing that the said amounts should be utilized only for capital investment towards purchase of machinery or setting up of new units etc., and also no evidence was placed to show that the said amount was reduced. from the cost of the assets, thereby the assessee sought for reimbursement of losses incurred during the first two years of its operation f management. Thus, the learned Senior Standing counsel, in the backdrop of the above factual matrix, contends that the receipt of Rs.4.6o crores paid towards running of the company is to be treated. as under revenue account and the assessing officer has rightly brought the said amount of Rs.4.60 crores to tax as revenue expenditure. 9. Learned senior standing counser a-lso contended that there was no evidence placed by the respondent/assessee to establish that the said amount was used as capital for setting up a new unit, expanding an existing unit, repayment of term loan or creation of capital assets or repairing the buildings or for any other infrastructural developments, and in the absence of such evidence, the only possible inference would be that the amount I /

7 was utilized for running the business and is a revenue receipt and as rightly computed by the Assessing Officer. 10. Learn,:d Senior Standing Counsel placed reliance on the decision of the Honble Supreme Court in the case of Sahneg Steel & P;ress Works Ltd, v, Commissioner of Income Tqxr wherein the, 'purpose test'was laid down to determine whether the receipt is capital or revenue and held that the time, source and form of subsidy are immaterial and the only important thing is its utilization rmd if the object is to run the business more profitably, then the re:ceipt would be treated as revenue receipt, and where the purpos,: is to set up new unit or to expand the existing unit, it would be treated as capital receipt. The said judgment further held that a particular purpose to spend the amount should also be checked to determine the nature of the receipt. 1 l. Learr,ed Senior Standing Counsel also placed reliance in the case of Comtnisstoner of Income Tax a. Madras Auto Sentice (4 tta.z wherein the Honble Supreme Court held that when the asset crea.ted. belonged to somebody else and the company I t997(71:;CC 764 2 (1998) 99 Taxman 575 (SC) .:l

8 endured advantage by spending the amount and in such a case, the expenditure has to be looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully, and when the company gains advantage by the spending of the said amount, it should be looked upon as revenue receipt and not capital receipt. 12. Learned senior standing counsel has also placed reliance on the case of commtssioner of Income Tqx u. ponni sugars qnd chemicats Ltd3 wherein the Hon,lcle Supreme court has reiterated the principre of 'purpose test'laid down in the case of sahneg steel & press works Ltd,.,s case(supra) and held that if the subsidy amount is used for repayment of the loans advanced or for setting up of new units, then it would be capital receipt. 13. Learned standing counsel by placing reliance on the above said judgments would contend that in the instant case, the amount of Rs.4.6o crores received by the respondent/assessee from the then Assam Government has been utilized for n-rnning the business, &S such it would be computed as revenue 3 (2OO8) 174 Taxrnan 87 (SC) /

9 expenditur3 and as such, prayed to set aside the orders of both the learnec ITAT and the CIT(A). 14. Per contra, the learned counsel appearing for the respondenl--assessee submitted that the suni of Rs. 4.60 crores was received by the respondent-assessee aS promoters' contributic,n from the Government of Assam with the specific object of rr:viving a sick industrial unit that had reached a stage of complete stagnation. It was further contended that the said amount was neither received in the ordinaly course of business nor earnerl as income and it was emphasized that the assessee had under-taken the responsibility of reviving an industrial unit which wasi virtually in a comatose condition, and it was for this very purpr)se, the amount of Rs. 4.6O crores was granted to the assessee to enable it to resuscitate and revive the said unit, and the amoult was, in fact, utilized for the revival of the industrial unit. Thet'efore, it is contended that the receipt in question is clearly capital in nature and does not partake the character of income SC, &s to be included in the total income of the assessee. The learnr:d counsel further contended that both the learned ITAT as well ar; the CIT(A) have correctly appreciated the factual and

lega1 position in the proper perspective and alrowed the appeals, directing the Assessing Officer to delete the addition as revenue and treat it as capital receipt in the assessment orders, and contended that the appear filed by the appelrant/Revenue is devoid of merits and prayed to dismiss the instant appeal. 15' We have given earnest consideration to the rival submissions of learned senior standing counsel for Income Tax Department for appellant/Revenue and learned counsel for respondent/assessee and perused the material on record. 16. From the above factual matrix and the substantial question of law framed, the main issue for d.etermination is: Whether the receipt respondent/assessee is receipt? 10 of Rs.4.6O Crores capital receipt or the by revenue 17 - Though the assessee asserted that the amount of Rs.4.60 Crores, which is allegedly received from the then Government of Assam for revival of the sick unit i.e., respondent/assessee- company, nothing has been placed to show that the said amount has been used for repairs and development of the infrastructural facilities. Neither it was used for setting up of anJr new units for 2

11 revival of the company nor it was spent for any infrastructural facilities a:rd no material was placed on record to substantiate such utilization. 18. In the case of sahneg steel & Press works Ltd's case(suprat, the Hon'b1e Supreme Court has laid down the 'purpose test' to determine whether the receipt is capital or revenue re,:eipt. If the 'purpose test' as laid down by the Hon'ble Supreme C)ourt is applied to the facts of the present case, in the absence of evidence to show that the alnount of Rs.4.60 Crores received from the then Government of Assam was utilized for setting up new units or to expand the existing unit or to pay the loans advenced to the company for setting up of any new unit. Further the principle in Sahn eg Steel & Press Works Ltds is fortified in Madrq.s Auto Senfice (P) Ltd.'s case (supra) wherein it was held lly the Hon'ble Supreme Court that though the assets betonging to somebody else, the company derived enduring business trdvantage by expanding the amount and used for the purpose of conducting the business more profitably or more successful$, then the said amount will be revenue receipt and not the capital receipt. The same view was reiterated by the Hon'lcle A ,rd

t2 Supreme Court ln Ponni Sugars q.nd, Chemtcals Ltds case(supra). 19 ' In such view of the matter, the contentions of the respondent/assessee that the said amount of Rs.4.6o crores has been used for setting up any unit or utilized for any repair works to facilitate the running of the business or has been used for repairs of the company or for development of infrastructural facilities, in the absence of any material produced in support thereof, cannot hold water, and the said contentions a-re untenable and hence rejected. Thus, in our considered view, the orders passed by the learned ITAT and the CIT(A) are perverse and are liable to be set aside. Accordingly, the substantial question of law is answered in favour of the appellant/Revenue and against the respondent/assessee. 20. For the aforesaid findings, the appeal is allowed setting aside the orders of the learned ITAT in ITA. No. 3 a6 / Hyd / 2004 , dt'19'06.2oog, as welr as the CIT(A) in ITA.No.2rgg/cc- 1/CIT(A)V(Cent.l/2oo0-01, dt.19.og .2oot, by restoring the assessment order, dt.29.03 .2ooo, passed by the assessing authority. No order as to costs. ( I

13 assessment order, dt.29.C3.2000, passed by the assessing authority. No order as to costs. Consequently, miscellaneous petitions, if any, pending shall stand clost:d SD/.K.SHYLESHI NT REGISTRAR /ffRUE COPY// ON OFFICER To One Fair Crtpy to the HON'BLESRI JUSTICE P'SAM KOSHY v'lrv r -" ----iror iiis uoroship's kind Perusal) One Fair GI)PY to the HON'BLESRI JUSTICE SUDDALA CHALAPATHI RAO ' iror iiis Lordship's kind Perusal) 1. The ncome Tax AppellateTribunal' Hyderabad.P.T:|..A" Hyderabad' 2. one cc to smt. e. sapna Reddy_(sE(ron sc INCOME TAX) IOPUC] a. One CC to M/s. MN Advocates [OPUC] 4. 11 LR CoPies :-r-- ^a , ^.., .5.TheUnderSecretary,UnionoflndiaMinistryofLaw,JusticeandCompany Affairs, New Delhi 6. The secretary, Telangana Advocates Association Library' High court for the State of Telanga*, tiign Court Buildings at Hyderabad' 7. Twc CD CoPies kam W I a i tI EIit t,; ,i i i I j i I I

n t HIGH COURT DATED:30/01 12026 JUDGME:NT ITTA.No.SS1 of 2010 ALLOWING THE APPEAL 1HES oo 2 B ['i:B 2026 * I lb )- * 14