M/S CHATTA SUGAR CO. LTD,MATHURA vs. A.C.I..T CIRCLE-3, MATHURA

"Capital receipt of Rs.17,44,85,000/- During the year, the assessee company received Rs.17,44,85,000/- from Government of Uttar Pradesh. This is a capital receipt and hence not assessable to tax as per provisions of Income tax Act, 1961. This grant was given by Uttar Pradesh Government for payment to farmers in respect of outstanding cane dues for last 3-4 years. Copy of letter is enclosed for your kind perusal. The assessee has utilized the above grant in paying the cane price due as per statement attached." 2.3. The AO inter alia noted the fact that the letter dated 16.09.2008 issued by Special Secretary UP Govt shows that the Hon’ble Governor had accorded approved to such payment in view of disinvestment of shares in the sugar companies. The Assessing Officer further observed that the Assessee was a manufacturer of sugar, where sugarcane was a major raw material and the purchase of this raw material is always debited in the P&L account and therefore dues of the said outstanding amount was revenue in nature. The AO further noted that the payment of Rs.17,44,85,000/- was not on account of any capital subsidy or loan or the amount in trust, but grant to make repayment of trading liability. According to the AO, the assessee had rightly treated such sum as a trading receipt and included the same in its P&L Account as its income.

2.4. Further referring to the above observation of the Auditor for excluding the said amount from the income, the AO observed that no basis of formation of such opinion was given.

2.5. Thereafter, the AO discussed the decisions of the Hon’ble Madras High Court in the case of CIT vs Ponni Sugars and Chemicals Ltd. (2003) 260 ITR 605, which got affirmed by the Hon’ble Apex Court vide citation (2008) 306 ITR 392(SC), wherein, it held that concession of purchase tax was in no way connected to expenditure in setting up the industry and such incentive was revenue receipt. Further, the Assessing Officer relied upon the decisions of Sahney Steel and Press Works Ltd. vs CIT (1997) 228 ITR 253 (SC) and the decision of Merino Ply and Chemicals Ltd. vs CIT (1994) 209 ITR 508 (Cal) and observed that in this case the grant received by the assessee was to discharge its trading liability and thus it constituted trading receipt and not capital receipts as claimed by the assessee. The AO held that the subject receipt was clearly taxable up 2(24) and Section 28 of the Act.

2.6. The Assessing Officer further noted that assuming for the moment that the amount received by the assessee was a capital receipt, but the fact remained that the sum found its way in discharging trading liability.

Accordingly, the AO held that the assessee was thus not required to pay trading liability of cane growers and it was thus effective remission of such liability in favour of the assessee. Accordingly, the AO held that for this reason and in accordance with Section 41(1) of the Act, the corresponding amount of liability remitted i.e., Rs. 17,44,85,000/- constituted income of the assessee.

2.7. Thereafter, the AO again noted the fact that disinvestment of shares may be a view or consideration to the owner/State Government who is also the owner of majority stake in the company i.e. to enhance the intrinsic value of the company, but as far as the assessee is concerned, the subject receipt is clearly a revenue receipt.

2.8. In conclusion, the AO further relied upon case laws and held in concluding paras as under:-

In the case of Rollationers Ltd. vs. CIT (2011) 339 ITR 54 (Delhi), the assessee company was declared sick under the provisions of SICA. 1985 and its debts were restructured in pursuance to scheme and part of its debts were waived by financial institutions. In respect of waiver of cash credit limit, it was claimed by the assessee that the same did not constitute taxable income. Negating such contention, it was held by Delhi High Court that amounts relating to cash credit limit had irrecoverably gone to coffers of the company and such amounts were debited to profit & loss account and therefore constituted remission in terms of section 41(1) of the I.T. Act, 1961 even if section 28(iv) is found to be inapplicable. Similar view was taken by Delhi High Court in the case of Logitronics Private Ltd. vs. CIT (2011) 333 ITR 386. The intention of State Government to grant such money to the assessee i.e. disinvestment of shares may be a view or consideration to the owner/State Government who is also the owner of majority stake in the company i.e. to enhance the intrinsic value of the company, but as far as the assessee is concerned, the subject receipt is clearly a revenue receipt. The assessee on its part, except for stating that the subject sum was capital receipt, has not brought any material to substantiate its claim of capital receipt, The credit of grant to profit & loss account in itself may not be decisive factor to determine the taxability or the correct nature of any receipt. But the facts on records, leave no room of doubt that sum of Rs. 17,44,85,000 had all character of revenue receipt and in any case, constituted income under section 41(1) of the I.T. Act read with section 59 thereof. The said sum of Rs. 17,44,85,000 shall be treated as business income of the year under consideration.

3. Aggrieved with the assessment order, the assessee filed an appeal before the ld. CIT(A).

4. The ld. CIT(A) taking note of the fact that amount in question was received under the grant for payment of farmers in respect of canes due for last 3-4 years as the business of the assessee was not doing well. The ld. CIT(A) further noted that any amount paid to foster the business of the concern is to be considered as the revenue receipt as was also originally done by the assessee itself. The ld. CIT(A) also noted that the Assessing Officer also took note of the fact that though originally even the assessee accounted for it as a revenue receipt but during the computation of income while filing the return of income, on the advice of a C.A. the same was considered as capital receipt. The ld. CIT(A) also noted that it is also pertinent to mention that during the course of appellate proceedings the assessee was specifically asked to submit the Audit Report for the preceding assessment year i.e. A.Y 2008-2009 but despite giving ample opportunity no audit report was furnished.

4.1. The ld. CIT(A) also relied upon the decisions of jurisdictional Allahabad High Court in the case of Ratna Sugar Mills Co. Ltd. vs CIT [1958] 33 ITR 644 (All.) and of the Hon’ble Supreme Court in the case of Pontypridd and Rhondda Joint Water Board vs Otine (1946) 14 ITR (Supp,.)

45 and observed that when subsidy is received from a public fund to assist the assessee to carry on business, the object of subsidy is apparent i.e. to enable the assessee to run business more profitably, become more competitive etc. The ld. CIT(A) further observed that these are operational subsides and not capital subsidies and the source from which the amount is paid is not determinative, as in such cases the subsidy is paid from public fund but the character of the subsidy in the hands of recipient determines whether the subsidy is revenue or capital in nature.

4.2. Further as regards the findings of the AO on the issue of remission of liability in terms of section 41(1) of the Act, it is observed by the ld. CIT(A) that the assessee vehemently canvassed the point that the AO had wrongly invoked the provision of section 41(1) of the Act as the grant in aid received by the assessee could never be considered in terms of remission or cessations of liability thereby partaking the character of income in the hands of the appellant. In regard to the same it is observed by the ld. CIT(A) that the AO while discussed the whole issue of the grant in aid at length and held that the grant in aid was essentially of revenue in nature, therefore income of the assessee and that it was not a capital receipt and it was without prejudice and in the alternative only that the AO held as under :

Further, assuming for the moment, that the amount received by the assessee was capital receipt, but the fact remain that the said sum found its way in discharging trading liability. The assessee was thus, not required to pay trading liability of cane growers. It was thus effective remission of such liability in favour of the assessee and for the said reason also in accordance with section 41(1) of the I.T. Act, 1961 the corresponding amount of liability remitted i.e. Rs. 17,44,85,000 constitute income of the assessee. In the case of Rollationers Ltd. Vs. CIT (2011) 339 /TR 54 (Delhi), the assessee company was declared sick under the provisions of SICA, 1985 and its debts were restructured in pursuance to scheme and part of its debts were waived by financial institutions. In respect of waiver of cash credit limit, It was claimed by the assesee that the same did not constitute taxable income. Negating such contention, it was held by Delhi High Court that amounts relating to cash credit limit had irrecoverably gone to coffers of the company and such amounts were debited to profit & loss account and therefore constituted remission in terms of section 41(1) of the I.T. Act, 1961 even if section 28(iv) is found to be inapplicable. Similar view was taken by Delhi High Court in the case of Ligitronics Private Ltd. Vs. CIT (2011) 333 /TR 386.

4.3. The ld. CIT(A) further observed that from a perusal of the relevant part of the AO's order, it is borne out that state govt of UP infused the amount in the form of grant in aid towards the sick accounts of the assessee with the object of making good the famers claim of dues which were outstanding since long, therefore as regards the recipient of the grant in aid i.e. the assessee, these amount caused remission of its liability, therefore in his view the AO was correct in its approach while he treated the grant so received as causing cessation or remission of the liability in terms of section 41(1) of the Act. The ld. CIT(A) held that on either of the two scores whether the grant in aid is revenue receipt or it is causing a remission or cessation of liability in terms of section 41(1) of the Act, the action of the AO in treating grant under consideration as a revenue receipt and should be taxable and accordingly confirmed the addition of Rs.17,44,85,000/-.

4.4. The relevant extract of the order of the Ld. CIT(A) is reproduced as under:-

5.3 Thus, when subsidy is received from a public fund and these are to assist the assessee to carry on or business, the object of subsidy is apparent i.e. to enable the assessee to run business more profitably, become more competitive etc. These are operational subsidies and not capital subsidies. The source from which the amount is paid is not determinative, as in such cases the subsidy is paid from public fund but the character of the subsidy in the hands of recipient determines whether the subsidy is revenue or capital in nature. Therefore, the addition has been made rightly by the Ld. A.O by holding that the amount of grant received by the appellant from the state government as revenue receipt instead of capital receipt as shown in the computation of income filed as per the advice of the C.A. Based upon the findings as given in the AO order and the case laws as discussed by him, as well the aforesaid case laws in Ratna Sugar Mills Co. Ltd (supra), as per which the true character of the grant in aid is found to be a receipt revenue in nature, therefore, the AO's action as such is sustainable. Further as regards the findings of the AO on the issue of remission of liability in terms of section 41(1) of the Act, it is observed that the appellant vehemently canvassed the point that the AO had wrongly invoked the provision of section 41(1) of the Act as the grant in aid received by the appellant could never be considered in terms of remission or cessations of liability thereby partaking the character of income in the hands of the appellant. In regard to the same it is observed that the AO while discussed the whole issue of the grant in aid at length in the larger part of which it was held that the grant in aid was essentially of revenue in nature, therefore income of the appellant and not that it was a capital receipt and it was without prejudice and in the alternative only that the AO held as under : Further, assuming for the moment, that the amount received by the assessee was capital receipt, but the fact remain that the said sum found its way in discharging trading liability. The assessee was thus, not required to pay trading liability of cane growers. It was thus effective remission of such liability in favour of the assessee and for the said reason also in accordance with section 41(1) of the I.T. Act, 1961 the corresponding amount of liability remitted i.e. Rs. 17,44,85,000 constitute income of the assessee. In the case of Rollationers Ltd. Vs. CIT (2011) 339 /TR 54 (Delhi), the assessee company was declared sick under the provisions of SICA, 1985 and its debts were restructured in pursuance to scheme and part of its debts were waived by financial institutions. In respect of waiver of cash credit limit, It was claimed by the assesee that the same did not constitute taxable income. Negating such contention, it was held by Delhi High Court that amounts relating to cash credit limit had irrecoverably gone to coffers of the company and such amounts were debited to profit & loss account and therefore constituted remission in terms of section 41(1) of the I.T. Act, 1961 even if section 28(iv) is found to be inapplicable. Similar view was taken by Delhi High Court in the case of Ligitronics Private Ltd. Vs. CIT (2011) 333 /TR 386. Therefore from a perusal of the relevant part of the AO's order as reproduced above, it is borne out that state govt of UP infused the amount in the form of grant in aid towards the sick accounts of the appellant with the object of making good the famers claim of dues which were outstanding since long, therefore as regards the recipient of the grant in aid i.e. the appellant, these amount cause remission of its liability, therefore in my view the AO is correct in its approach while he treated the grant so received as causing cessation or remission of the liability in terms of section 41(1) of the Act. Therefore, on either of the two scores whether the grant in aid is revenue receipt or it is causing a remission or cessation of liability in terms of section 41(1) of the Act, I agree with the AO that grant under consideration is a revenue receipt and should be taxable and accordingly confirm the addition of Rs.17,44,85,000/- Thus, Ground No 2 is dismissed.”

5. Aggrieved with the said order, the assessee is in appeal before us by raising the following grounds of appeal:-

“1. Whether the learned CIT(A) as well as the assessing officer was justified in holding that grant of Rs 174485000.00 received by the assessee company from UP Government for payment to cane growers as income of the assessee company u/s 41(1) of the Income Tax Act, 1961 2. Whether aid or grant received from the shareholder to meet out the liability constitute income.

3. Whether the grant in aid amounting to Rs 174485000.00 is revenue receipts and it is causing a remission or cessation of liability.”

6. During the course of hearing before us, the assessee filed the following submissions:

Written submission filed dated 27.03.2025 (first submission)

“The appellant is in appeal against order dated 20.01.2015 passed by learned CIT (Appeals), Agra in the matter of assessment order dated 02.12.2011 passed by the Assistant Commissioner of Income Tax-3, Mathura (the ‘AO’) under section 143(3) of the Income tax Act, 1961 (the ‘Act’) for assessment year(s)2009-10.

2. The solitary issue raised in this appeal is regarding the addition of Rs. 17,44,85,000/- to the assessee's total income by the Assessing Officer (AO) under Section 41(1) of the Income Tax Act, 1961. The appellant is a 100% Government of Uttar Pradesh (UP) owned Company operating a Sugar Mill, received a Grant from the UP Government to clear long outstanding sugarcane dues to Farmers. The AO incorrectly treated this Grant as a revenue receipt, specifically as a remission or cessation of a trading liability.

3. The appellant , facing severe financial crisis, was unable to meet its obligation to pay sugarcane dues to Farmers. The UP Government, which holds 100% shares in the Company came forward, provided a grant of Rs. 17,44,85,000/- to the appellant specifically for clearing these outstanding dues to Farmers.

4. The appellant initially credited this amount to its Profit and Loss account but subsequently deducted it in the Computation of Income, treating it as a capital receipt based on advice of Statutory Auditors of the Company who opined that the Grant in aidis to be treated as a capital receipt, not a revenue receipt.

6. The AO added this amount to the assessee's total income under Section 41(1) of the Act, alleging it to be a remission or cessation of a trading liability which action stood confirmed by the Ld. CIT(A). Therefore, present appeal before this Hon’ble Bench requiring following issue for determination:

7. The issue therefore, which needs determination is :

(a)Whether the grant of Rs. 17,44,85,000/- received from the UP government constitutes a revenue receipt under Section 41(1) of the Income Tax Act, 1961.

(b)Whether the grant can be considered a "remission or cessation" of a trading liability or a "benefit obtained" in respect of such liability, as contemplated under Section 41(1) of the Income Tax Act, 1961.

(c)Whether the AO erred in treating the grant as a taxable revenue receipt.

8. For adjudication of the issue it is considered expedient to draw kind attention of the Hon’ble Bench to the provisions of section 41(1) of the Act.

8.1. Section 41(1) opf the Act applies when an allowance or deduction has been made in a previous year for a loss, expenditure, or trading liability, and subsequently, the assessee obtains an amount or benefit in respect of that liability through remission or cessation.The terms "remission" and "cessation" imply a reduction or elimination of the liability by the creditor, typically through a waiver, settlement at a reduced amount, or write-off without actual payment. "Benefit obtained" refers to advantages derived from the creditor concerning the liability, such as tax concessions or other forms of relief.

8.2 In this case, on hand the assessee did not obtain any remission or cessation from its creditors (the farmers). The full amount of the outstanding dues was paid. The grant was provided by the assessee's shareholder (the UP government), not the creditors. This cannot be construed as a remission or cessation of liability by the creditors. The assessee did not derive any "benefit" from the creditors. The grant facilitated the payment of the liability, but it did not reduce or eliminate the liability itself. The grant was provided by the Shareholder to fullfill the legal obligation of the Company, and was not provided as a benefit to the company in respect to the Companies Creditors.

8.3 The nature of the grant provided by the shareholder was to ensure the assessee's compliance with its legal obligations and to protect the public interest. Such financial assistance from a shareholder, particularly a government shareholder, should not be treated as a revenue receipt under Section 41(1) of the Act and the the Statutory Auditors have correctly pointed out that the grant is a capital receipt.

8.4 It is vital to distinguish between revenue and capital receipts. Grants provided to facilitate the functioning of a Company, and to allow the Company to fulfill its legal obligations, in the facts and circumstances of the case is to be held capital in nature.

9. The AO's contention that the grant is a revenue receipt is unsustainable. Relaince is placed to the following Judgements:

9.1 Siemens Pub. Communication Network P. Ltd Vs CIT (2017) 390 ITR 1(S.C) (Page-1-2)

“2. The Assessment Years in question are 1999-2000, 2000- 2001 and 2001-2002. The point involved in the present appeals is short and precise. The subvention received by the Assessee - Company from its parent Company in Germany in a situation where the Assessee - Company was making losses has been treated to be a revenue receipt by the Assessing Officer. Though the First Appellate Authority [Commissioner of Income Tax (Appeals)] and the learned Income Tax Appellate Tribunal ("Tribunal" for short) has reversed the said finding, the High Court, by the orders under challenge, has restored the view taken by the Assessing Officer. Aggrieved the Assessee has filed the present appeals.

3. The question of law that was presented before the High Court, namely, whether subvention was capital or revenue receipt, was sought to be answered by the High Court by making a reference to two decisions of this Court in Sahney Steel & Press Works Ltd. v. CIT [1997] 94 Taxman 368 and CIT v. Ponni Sugars &Chemicals Ltd. [2008] 174 Taxman 87. The view expressed by this Court that unless the grant-in-aid received by an Assessee is utilized for acquisition of an asset, the same must be understood to be in the nature of a revenue receipt was held by the High Court to be a principle of law applicable to all situations. The aforesaid view tends to overlook the fact that in both Ponni Sugars& Chemicals Ltd.'s case (supra) and Sahney

Steel &Press works Ltd. (supra) the subsidies received were in the nature of grant-in-aid from public funds and not by way of voluntary contribution by the parent Company as in the present cases. The above apart, the voluntary payments made by the parent Company to its loss making Indian company can also be understood to be payments made in order to protect the capital investment of the Assessee Company. If that is so, we will have no hesitation to hold that the payments made to the Assessee Company by the parent Company for Assessment Years in question cannot be held to be revenue receipts. We also find such a view in a recent pronouncement in CIT v. Handicrafts & Handlooms Export Corpn. of India Ltd. [2014] 49 taxmann.com488/226 Taxman 178 (Mag.) (Delhi) with which we are in respectful agreement.

4. For the aforesaid reasons, we allow the present appeals; set aside the order of the High Court and answer the liability of the Assessee for the Assessment Years in question in the above manner.

9.2 In the case of PCIT Vs State Fisheries Development Corporation Ltd. (2019) 414 ITR 443 (Cal) the Hon’ble Calcutat High Court had the occasion to consider an identical controversy wherein the Hon’ble High Court held as under:(Page-3-8)

“The fundamental principle for distinguishing capital receipt from revenue receipt in relation to Government grant has been laid down by the Supreme Court in the case of Sahney Steel & Press Works Ltd. v. CIT [1997] 94 Taxman 368/228 ITR 253. That was a case involving government subsidy in the form of certain time bound incentives and facilities. These incentives and facilities included refund of sales tax on raw materials, machineries and finished goods. The Supreme Court found that the incentives and facilities under a subsidy scheme to enable the assessee to acquire new plant or machinery for expansion of manufacturing capacity or set up new industrial undertaking could constitute capital receipt. In that case, however, the scheme contemplated for refund of sales tax on purchase of machinery and raw materials, subsidy or power consumption and certain other exemptions on utilities consumed. The Supreme Court rejected the plea of the assessee for treating such facilities and incentives as capital receipt on the reasoning that such subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. [Para 4]

So far as assessee's case in this appeal is concerned, Rs. 3.60 crores was received as grant-in-aid in the relevant previous year towards salary and provident fund dues. On surface test, receipt under these heads no doubt has the attributes of revenue receipt. But there are two factors which distinguish the character of the grant-in-aid which the assessee wants to be treated as capital receipt. Said sum was not on account of any general subsidy scheme. Secondly, the sum was given by the State to a wholly-owned company which was facing acute cash crunch. Financial status of the company appears from the submission of the assessee's representative recorded in the order of the first Appellate Authority and there is no denial of this fact in any of the materials placed. [Para 6]

In the case of the assessee, though it is not a grant from a parent company to a subsidiary company, the grant is from the State Government, which was in effect, hundred per cent shareholder of the assessee. Rs.3.60 crores was meant for payment of staff salaries and provident fund dues. As already observed, these item heads may bear the label of revenue receipt on the surface, it is apparent that the actual intention of the State was to keep the company, facing acute cash crunch, floating and protecting employment in a public sector organization. There is no separate business consideration on record between the grantor, that is the State Government and the recipient thereof being the assessee. The principle of law as laid down in the case of Siemens Public Communication Network (P.) Ltd. v. CIT [2017] 77 taxmann.com 22/244Taxman 188/390 ITR 1 (SC) is that voluntary payments made by the parent company to its loss making Indian subsidiary can also be understood to be payments made in order to protect the capital investment of the assessee-company. Though the grant-in-aid in this case was received from public funds, the State Government being 100 per cent shareholder, its position would be similar to that of, or at par with a parent company making voluntary payments to its loss making undertaking. No other specific business consideration on the part of the State has been demonstrated in this appeal. The assistance extended appears to be measures to keep the assessee-company floating, the assessee being, for all practical purposes an extended arm of the State. Though large part of the funds were applied for salary and provident fund dues, the object of extension of assistance, to ensure survival of the company. [Para 12]

As regards the funds extended for flood relief, the same cannot constitute revenue receipt. Flood relief does not constitute part of business of the assessee. Accordingly the question is answered in favour of the assessee and confirm the finding of the Tribunal. [Para 13]”

9.3 Against the said Judgement revenue preferred SLP before the hon’ble supreme Court which also stood dismissed as found reported in PCIT Vs State Fisheries Development Corporation Ltd. (2019) 102 taxmann.com 221 (SC) (Page-9)

Section 4 of the Income-tax Act, 1961- Income - Chargeable as (Grant-in-aid)- Assessment year 2006-07- High Court by impugned order held that where Government gave grant-in-aidto a company wholly-owned by Government, facing acute cash crunch, to keep company floating, even though large part of funds were applied by company for salary and provident funds, grant received was capital receipt - Whether Special Leave Petition filed against impugned order was to be dismissed - Held, yes

In the light of above, it is submitted that the authorities below have erred in treating the grant of Rs. 17,44,85,000/- as a revenue receipt under Section 41(1) of the Income Tax Act, 1961 ignoring the legal position that grant, provided by the shareholder, is a capital receipt and not taxable under Section 41(1) of the Act. Therefore, it is respectfully prayed that the addition of Rs. 17,44,85,000/- to the assessee's total income be deleted.”

Written submission filed dated 27.03.2025 (second submission)

The impugned order passed by the Ld. CIT(A) is directly in conflict with the Supreme Court's dismissal of the Special Leave Petition (SLP) in Principal Commissioner of Income-tax, Kolkata v. State Fisheries Development Corporation Ltd. ([2019] 102 taxmann.com 221 (SC) • Government Grant to Wholly-Owned Company: The Supreme Court upheld the Calcutta High Court's decision that a grant-in-aid given by the Government to a wholly-owned Government company facing a severe cash crunch is a capital receipt. • Purpose of the Grant: The grant was provided to "keep the company floating," indicating it was meant to address the company's fundamental financial viability, not merely its day-to-day operational expenses. • Application of Funds: Even though a significant portion of the grant was used to pay salaries and provident funds (which are typically revenue expenses), the grant's overall nature remained capital.

The CIT(A) in the case on hand concluded that the grant received by the appellant was a revenue receipt, primarily because it was used to discharge a trading liability (payment to cane growers).

This directly conflicts with the Supreme Court's ruling, which states that a similar grant, even when used for revenue-related expenses (salaries, provident funds), can still be a capital receipt.

The Hon’ble Supreme Court emphasized the purpose of the grant, which was to ensure the company's survival. In the case of the appellant the Grant was made because appellant was in a "very bad" financial position and could not pay its cane growers. This indicates that the grant's underlying purpose was to address the company's financial distress, similar to the State Fisheries Development Corporation case. The CIT(A) order puts much more weight into the use of the funds, rather than the reason the funds were granted. Both cases involve grants to wholly-owned government companies. This similarity strengthens the relevance of the Supreme Court's ruling

In summary, Hon’ble Supreme Court's Judgement in the State Fisheries Development Corporation Ltd. case establishes that government grants given to financially distressed, wholly-owned companies to ensure their survival are capital receipts. The CIT(A)'s order, which treated a similar grant as a revenue receipt, is unsustainable and must be reversed in light of this binding precedent.

7. In reply, the Ld. CIT(DR) filed a written submission dated 11.04.2025 as under:-

This written submission summarizes the oral arguments advanced by the undersigned during the hearing on 03.04.2025.

2. The sole issue to be decided in this case is whether the grant of Rs.17,44,85,000/- received from Government of UP through Uttar Pradesh Rajya Chini Nigam Limited (A Government of U.P. Undertaking) for payment to cane farmers in respect of their outstanding dues for some years is taxable income.

3. The AO has noted that originally, the assessee had accounted this grant as revenue receipt in the books of accounts but subsequently, while filing the Return of Income claimed the same as capital receipt on the advice of it's consultant/CA.

5. It is only for assumption that the A.O. has noted that even if the amount was a capital receipt as claimed by the assessee, the same was utilized in discharging a trading liability and thus, the assessee was not required to pay trading liability of cane farmers. Thus effectively, the assessee got a remission of the such liability which was taxable u/s 41(1).

6. The CIT(A) in his detailed order, concluded that the said receipt was revenue receipt in nature. He observed that the AO applied section 41(1) only without prejudice and in the alternative. He noted that the Government of U.P. infused this amount as grant in aid with the object of clearing farmers' long outstanding dues which as regards recipient/ assessee caused remission/ cessation of trading liability taxable u/s 41(1) of the Act. Thus, CIT(A) upheld the addition on both counts holding the grant in question as a revenue receipt. It is undisputed that in earlier AYs, the assessee has claimed and been allowed these purchases as expenditure.

10. Hon'ble Allahabad High Court (jurisdictional High Court) examined the issue in the case of H. R. Sugar Factory (P.) Ltd. v. CIT [1970] 77 ITR 614 (All), wherein to enable the sugar factories in Uttar Pradesh to start early crushing during the ensuing session, the Central Government allowed to such factories which start crushing earlier, a concession of four annas per maund on cane crushed and on that account the assessee received Rs. 40,419 from the Govt. but still even if the receipt was of a casual nature, the case was held to be not covered by section 4(3)(vii) of the Indian Income-tax Act, 1922 (equivalent to section 10(3) of the Act of 1961), and the receipt was held to be taxable.

11. Hon'ble Allahabad High Court (jurisdictional High Court) had also examined the issue in the case of Ratna Sugar Mills Co. Ltd. vs. CIT (1958] 33 ITR 644 (Allahabad). The Assessee-company carrying on business of manufacturing sugar, received certain amount by way of subsidy from Government of India in order to compensate it for payment of wages to its workmen at enhanced rate in terms of order of State Government. It claimed that said sum of money received by it was not income arising from business. The Court agreed with the Tribunal and held that the amount in question was received as a trading receipt and must be held to be income arising from business. The HC referred to the decision of the Supreme Court in the case of Raghuvanshi Mills Ltd. v. CIT [1952] 22 ITR 484 (SC) wherein the assessee company had received a certain amount from the insurance company as a result of fire which was paid on account of loss of profits. The Supreme Court held that it was taxable income. The High Court held as under: "The principle laid down by the Supreme Court in that case is clearly applicable to the case before us. In the present case, as a result of complying with the directions issued by the U.P. Government to pay additional wages to the workmen, there was loss of profit to the assessee company. In order to make up this loss, the assessee company made a representation to the Government of India for being allowed to earn higher profits, if the price for sale of sugar be increased as requested. In the alternative, compensation was claimed in the form of a subsidy. It was this latter prayer which was accepted. The payment by the Government of India was thus specifically for the purpose of covering loss of profits of the assessee company and it was for that very purpose that the subsidy had been demanded. Consequently, this amount was received as a trading receipt and must be held to be income arising from the business of the assessee company so that it is taxable as such and section 4(3)(vii) of the Income-tax Act is inapplicable."

12. On similar facts as the present case, the Hon'ble ITAT Amritsar in Gurdaspur Co-Op. Sugar Mills v. DCIT, [2009] 122 TTJ 528 (Amritsar) has decided the matter in favour of Revenue. Where assessee was a co-operative society registered under Punjab Co- operative Societies Act, 1961, and was running a sugar mill and it had been granted a loan by Rural Development Board to compensate to it on account of payment of additional price of sugarcane to farmer, conversion of same later into grant-in-aid, the Tribunal held that such grant would constitute taxable revenue receipt.

14. Hon'ble Patna High Court in Jamshedpur Co-operative Stores Ltd. v. CIT [1986] 157 ITR 127 (Pat) held:

That the subsidies were not meant for the growth of any industry. They had no nexus with fixed capital. It was not a capital receipt. The Tribunal had found that the assessee received the payments regularly and the object of the payments was to promote the welfare of employees of certain companies. They were not casual receipts. They were revenue receipts and assessable as such.

16. Similarly, Hon'ble Madras High Court in Triplicane Urban Cooperative Society Ltd. v. CIT [1980] 126 ITR 125 (Mad), held: That where the assessee received subsidy to meet additional expenses on staff and rent under scheme of the Government for the purpose of stabilizing the prices of import commodities, the subsidy was to be taxed as revenue receipt." 16.1 Reliance is also placed on the House of Lords decision in Pontypridd and Rhondda Joint Water Board v. Ostime (H.M. Inspector of Taxes), [1946] 14 ITR 45 (HL).

17. In view of above case laws, it is unambiguously clear that the grant received by the assesee from Government of U.P. was to discharge a trading liability i.e. outstanding payments of sugar cane farmers, and thus, it was a trading receipt taxable u/s 2(24) r.w.s. 28 of the Act. Rejoinder to Assessee's Written submission 18. Vide the written submission filed on 27.03.2025, the Authorised Representative has contended that the UP Government is the sole shareholder, and the grant came from a shareholder and not a creditor, therefore, it cannot be treated as income from remission. It is argued that the grant should be treated as a capital receipt, not taxable under Section 41(1). Reliance has been placed on Siemens Public Communication Network P. Ltd. us CIT [2017] 390 ITR 1 (SC) and PCIT vs State Fisheries Development Corporation Ltd. (2019) 414 ITR 443 (Cal).

20.3 Thirdly, the Apex Court distinguished Ponni Sugars's case and Sahney Steel case as in those cases, the subsidies received were in the nature of grant-in-aid from public funds and not by way of voluntary contribution by the parent Company as in the Siemens case. Clearly in the present case, the grant has been received from public funds and therefore ratio given in Ponni Sugars's case and Sahney Steel case would apply as against the ratio of Siemens case.

22.2 In Handicrafts & Handlooms Export Corpn. case, Court noted that there was a basic difference between grants made by a Government or from public funds generally to assessees in a particular line of business or trade, with a view to help them in the trade or to supplement their general revenues or trading receipts and a case of a private party agreeing to make good the losses incurred by an assessee on account of a mutual relationship that subsists between them. The Court held that the former were treated as trading receipts because they are made in order to assist in the carrying on of the trade. It held that the payment with which the Court was concerned in that case were different as they were not grants received from the Government on such general grounds. Clearly, the amount in question in the instant case has been received from Government or public funds, therefore, the ratio of Handicrafts & Handlooms Export Corpn. Case would not apply.

8. In rejoinder, the assessee ld. AR filed a written submission on 15.04.2025 as under:-

2. The Ld. CIT DR submitting his case, justifying the Assessment made and has distinguished the case laws relied upon by the appellant during the course of hearing which got concluded on 03.04.2025.

4. Vide Para-8 to 16 the Ld. CIT D.R has placed reliance to few case laws to buttress his submission that amount as received by the appellant is taxable. Pertinent may to be mention here that none of the case law refereed and relied upon by the Ld. CIT DR is post Year 2017, 2018 and 2019 in which years the Hon'ble Apex Court and Hon' ble Calcutta High Court delivered Judgements on which reliance was placed by the appellant. Therefore, none of the Four Judgement relied upon by the appellant has been matter of judicial consideration by any of the Hon’ble Court in cases relied upon by the Ld. CIT-DR.

5. In Para 8 and 9, the Ld. CIT-DR has relied upon Judgement of Apex Court in the cases of Sahney Steels & Press Works Ltd Vs CIT (1997) 228 ITR 253 (SC) and CIT Vs Ponni Sugar & Chemical Ltd. (2008) 306 ITR 392 (S.C). Assessee respectfully submits that the judgement of the Hon’ble Apex Court in the cases of Sahney Steels (supra) & Ponni Sugars (supra) stood considered in the case of Siemens Public Communication Network (P.) Ltd. Vs CIT (2017) 77 taxmann.com 22 (SC) which has been relied upon by the appellant. The Hon’ble Supreme Court in the case of Siemens Public Communication Network (P.) Ltd (supra) the Hon’ble Supreme Court held as under:

“3…………..The aforesaid view tends to overlook the fact that in both Ponni Sugars& Chemicals Ltd.'s case (supra) and Sahney Steel &Press works Ltd. (supra) the subsidies received were in the nature of grant-in-aid from public funds and not by way of voluntary contribution by the parent Company as in the present cases. The above apart, the voluntary payments made by the parent Company to its loss-making Indian company can also be understood to be payments made in order to protect the capital investment of the Assessee Company. If that is so, we will have no hesitation to hold that the payments made to the Assessee Company by the parent Company for Assessment Years in question cannot be held to be revenue receipts.”

“The intension of State Government to grant such money to the assesse i.e. disinvestment of shares may be a view or consideration to the owner/State Government who is also the owner of majority stake in the company i.e. to enhance the intrinsic value of the company, but as far as the assesse is concerned, the subject receipt is clearly a revenue receipts…...”

7. Ld. CIT(A) too in Page No. 9, Para 5.1 has confirmed the AO’s view as under:

“As has also observed by the A.O. that the intention of State Government to grant such money to the assesse i.e. disinvestment of shares may be a view or consideration to the owner/State Government who is also the owner of majority stake in the company i.e. to enhance the intrinsic value of the company, but as far as the assesse is concerned, the subject sum was capital receipts has not brought any material to substantiate its claim of capital receipt. Despite giving several opportunities no material was placed on record by the appellant to prove that the grant in question is a capital grant and neither the previous year tax audit report as called for was filed by the appellant during the course of assessment proceedings. The facts on records, leave no room of doubt that sum of Rs. 17,44,85,000 had all character of revenue receipt and should be taxed as business income of the year under consideration. Apart from the decisions relied upon by the A.0 in the assessment order which are squarely covered to the appellant for considering the grant as revenue receipt”

8. Assessee respectfully submits that this material fact was neither addressed during the course of hearing by the Ld. CIT-DR and has not been discussed in its Written Submission. Once the purpose of granting aid was disinvestment of shares in order to increase the intrinsic value of the Company such an amount by no stretch can be towards revenue account and has to be treated towards capital account only as has been done by the appellant. The application of such amount was for payment of outstanding amount due to the Canegrowers but the purpose and object prompting the payer was made loud and clear in Letter dated 16.09.2008 issued by the State Government of Uttar Pradesh that amount is being given in consideration of disinvestment of its Shares held in U.P Sugar Mills Corporation Limited, in order to increase the intrinsic value of the Shares. State of U.P is holding 99.9% shares in U.P Sugar Mills Corporation and Chatta Sugar Mills Limited (appellant) is a Subsidiary Company of U.P State Sugar Corporation Limited. Thus the appellant is a wholly owned Government Company.

9. Appellant wish to draw your kind attention to the Letter dated 16.09.2008 issued by the Special Secretary, Government of Uttar Pradesh wherein it has been observed as under:

सुभाष चं� ि�वेदी िवशेष सिचव उ�र �देश शासन |

लखनऊ िदनांक 16 िसत�र 2008

उ�र �देश चीनी िनगम िलिमटेड की चीनी िमलो के पेराई स� 2007-08 के बकाया मू( भुगतान हेतु धनरािश की +ीकित |

उपयु,� िवषय की और आपका .ान आकृ0 करते 1ए मुझे यह कहने का िनद4श िक रा5पाल महोदय उ�र �देश रा5 चीनी िनगम िल० म7 रा5 के सम8 अंशो के िविनवेश के :ि0गत िनगम िक चीनी िमलो के िवगत पेराई स� 2007-08 के बकाया ग;ा भुगतान हेतु <० 246,00,00,000/- (दो सौ िछयालीस करोड़ @पए मा� ) िक धनरािश के Aय करने की सहष, +ीकृित �दान करते है तथा आपको �ािधकृत करते है िक कृपया िव�ीय ह8 संDा -1 के पैरा - 209 म7 विण,त �िFयानुसार इस धनरािश को राजकीय कोष से आहIरत कर उ�र �देश चीनी िनगम िल० को उनकी चीनी िमलो के बकाया ग;ा मू( भुगतान हेतु तJाल उपलK

उ� धनरािश उसी काय, के िलए Aय िक जायेगी, िजस हेतु +ीकृित िक गई है | Aय िक धनरािश का उपयोिगता �माण प� शासन को शीLितशीL उपलK कराया जायेगा |

�Mगत Aय चालू िव�ीय वष, (2008-09) के आय Aय की अनुदान संDा 24 के 2852 उNोग 08 उपभो�ा, उNोग 201 चीनी 10 उ�र �देश रा5 चीनी िनगम िलिमटेड की कर िनजीकरण/िवFय -01, ग;ा मू( का भुगतान 20 सहायक अनुदान/अंशदान/राज के नाम डाला जायेगा | यह आदेश िव� िवभाग के अशासकीय संDा बी -4-147/दस -2008 िदनांक ............. से �ाO उनकी सहमित से िनग,त िकये जा रहे है

ENGLISH TRASLATION BY THE APPELALNT Subhash Chandra Trivedi Special Secretary Government of Uttar Pradesh Sugar Commissioner Uttar Pradesh, Lucknow

Lucknow, Dated 16th September 2008

Approval of Funds for Payment of Outstanding Cane Price for the Crushing Season 2007-08 by Uttar Pradesh Sugar Corporation Limited

I would like to draw your attention to the above-mentioned subject and inform you that the Hon'ble Governor has graciously approved the expenditure of Rs. 246,00,00,000 (Two hundred forty-six crores only) for the payment of the outstanding cane price for the Uttar Pradesh State Sugar Corporation Limited's sugar mills for the previous crushing season 2007-08, in view of the disinvestment of the state's shares in the Corporation. The Governor has also authorized you to immediately withdraw this amount from the government fund as per the procedure outlined in Paragraph 209 of Financial Code No. 1 and make it available to Uttar Pradesh State Sugar Corporation Limited for the payment of outstanding cane prices for their sugar mills.

The above-mentioned amount will be spent solely for the purpose for which it has been approved. The certificate of utilization for the expenditure will be submitted to the government as soon as possible.

The expenditure in the current financial year (2008-09) will be covered under Grant Number 24 for income and expenditure, with the following details: 2852 Industry 08 Consumers, Industry 201 Sugar 10 Uttar Pradesh State Sugar Corporation Limited for privatization/sale - 01, cane price payment 20, auxiliary grants/contributions will be made in the name of the state.

This order is being issued with the approval obtained from the Finance Department's unofficial number B-4-147/Das-2008, dated .............

in the cases of Sahney Steels (supra) & Ponni Sugars (supra) as the same stood already considered by the Hon’ble Supreme Court and it is elementary position of law that higher wisdom should prevail when the question is of interpretation.

12. The Ld. CIT D.R in Para 10 has placed reliance to the Judgement of Hon’ble Allahabad High Court in the case of H.R Sugar Factory (P) Ltd Vs CIT (1970) 77 ITR 614 (All.) wherein amount received from Government was held taxable. In this regard it is submitted that the issue before the Hon’ble High Court is not comparable as the amount was paid to Sugar Factory which was not owned by the Government.

13. In Para-11, reliance is placed to the Judgement of Hon’ble Allahabad High Court in the case of Ratna Sugar Mills Co. Ltd Vs CIT (1958) 33 ITR 644 (All). The facts are clearly distinguishable. In the case of Ratna Sugar Mills Co. Ltd (supra), as a result of complying with the directions issued by the U.P. Government the Company had to pay additional wages to the workmen, which resulted into loss of profit to the Company. In order to make up this loss, the Company made a representation to the Government of India for being allowed to earn higher profits, if the price for sale of sugar be increased as requested. In the alternative, compensation was claimed in the form of a subsidy. It was this latter prayer which was accepted. The Hon’ble High Court found that this payment by the Government of India was thus specifically for the purpose of covering loss of profits of the Company and it was for that very purpose that the subsidy had been demanded. Consequently, this amount was received as a trading receipt and must be held to be income arising from the business of the Company so that it is taxable as such.

(supra). Since, the Judgement of Hon’ble Supreme Court in the case of Siemens Public Communication Network (P.) Ltd (supra) is dated 07th December 2016 and such Judgement was not available before the Hon’ble ITAT which order was authored on 31.12.2008 no reliance can be placed to the order of Gurdaspur Co-op Sugar Mills (supra).

19. Vide Para-16, the Ld. CIT DR has placed reliance to the Judgement of Hon’ble Madras High Court in the case of Triplicane Urban Co-operative Society Ltd Vs CIT (1980) 126 ITR 125 (Mad) in which case assessee therein received subsidy to meet staff and rent expenses, such subsidy was held taxable.

20. Vide Para 18 to 24 the Ld. CIT Dr has tried to distinguish the case laws relied upon by the appellant during the course of hearing. None of the point of distinction can take away the force emanating from the ratio laid down in cases relied upon by the appellant.

9. We have heard both the parties and considered the material available on record. The issue involved in this appeal is whether the grant of Rs.17,44,85,000 by the Uttar Pradesh Government to the assessee company is a capital receipt in the hands of the assessee company as claimed by the assessee or whether it is a revenue receipt in the hands of the assessee and taxable and/ or whether it is a cessation of liability in the case of the assessee and therefore this amount was taxable u/s 41(1) of the Act as held by the AO. The assessee explained before the AO as well as before the Ld. CIT(A) that the U.P., government provided a grant of Rs.17,44,85,000/- to the assessee for clearance of sugar cane dues to the farmers in public interest as the financial position of the company was very bad. Further, it mainly explained before the Assessing Officer that it was a capital receipt and therefore not taxable. However, in the submission made by the ld. AR filed on 15/04/2025 submitted that the Government of Uttar Pradesh had given the said amount of Rs.17,44,85,000/- to increase the intrinsic value of its shares held in the company, which clearly bears the character of capital receipt and this material aspect has been ignored by the authorities below.

It was further submitted by the ld. AR that the amount of Rs.17,44,85,000/- was voluntarily contributed by the State Government keeping in mind the intrinsic value of its shares and public policy. The above explanation of the Ld. AR has to be seen in context keeping in view the decisions of the various case laws relied upon by both the parties as to whether the intent of the said grant of the grantor (which is the Government of Uttar Pradesh in this case) has to be seen or whether the utilization of the said grant by the recipient (which is the assessee in this case) has to be seen to determine the nature and taxability of the receipt of Rs.17,44,85,000/- 9.1. The grant of Rs. 17,44,85,000 was announced vide letter dated 16.09.2008 issued by the Special Secretary, Govt. of Uttar Pradesh. A typed version along with an English translation of the said letter in para-9 of the submission of the Ld. AR dated 15/04/2025 is reproduced as under:-

लखनऊ िदनांक 16 िसत�र 2008

उ�र �देश चीनी िनगम िलिमटेड की चीनी िमलो के पेराई स� 2007-08 के बकाया मू( भुगतान हेतु धनरािश की +ीकित |

उपयु,� िवषय की और आपका .ान आकृ0 करते 1ए मुझे यह कहने का िनद4श िक रा5पाल महोदय उ�र �देश रा5 चीनी िनगम िल० म7 रा5 के सम8 अंशो के िविनवेश के :ि0गत िनगम िक चीनी िमलो के िवगत पेराई स� 2007-08 के बकाया ग;ा भुगतान हेतु <० 246,00,00,000/- (दो सौ िछयालीस करोड़ @पए मा� ) िक धनरािश के Aय करने की सहष, +ीकृित �दान करते है तथा आपको �ािधकृत करते है िक कृपया िव�ीय ह8 संDा -1 के पैरा - 209 म7 विण,त �िFयानुसार इस धनरािश को राजकीय कोष से आहIरत कर उ�र �देश चीनी िनगम िल० को उनकी चीनी िमलो के बकाया ग;ा मू( भुगतान हेतु तJाल उपलK

उ� धनरािश उसी काय, के िलए Aय िक जायेगी, िजस हेतु +ीकृित िक गई है | Aय िक धनरािश का उपयोिगता �माण प� शासन को शीLितशीL उपलK कराया जायेगा |

�Mगत Aय चालू िव�ीय वष, (2008-09) के आय Aय की अनुदान संDा 24 के 2852 उNोग 08 उपभो�ा, उNोग 201 चीनी 10 उ�र �देश रा5 चीनी िनगम िलिमटेड की कर िनजीकरण/िवFय -01, ग;ा मू( का भुगतान 20 सहायक अनुदान/अंशदान/राज के नाम डाला जायेगा | यह आदेश िव� िवभाग के अशासकीय संDा बी -4-147/दस -2008 िदनांक ............. से �ाO उनकी सहमित से िनग,त िकये जा रहे है A photocopy of the original letter dated 16/09/2008 (in Hindi) is also placed on page nos.35 to 36 of the paper book filed by the assessee, ENGLISH TRASLATION BY THE APPELALNT Subhash Chandra Trivedi Special Secretary Government of Uttar Pradesh Sugar Commissioner Uttar Pradesh, Lucknow Lucknow, Dated 16th September 2008

Approval of Funds for Payment of Outstanding Cane Price for the Crushing Season 2007-08 by Uttar Pradesh Sugar Corporation Limited

I would like to draw your attention to the above-mentioned subject and inform you that the Hon'ble Governor has graciously approved the expenditure of Rs. 246,00,00,000 (Two hundred forty-six crores only) for the payment of the outstanding cane price for the Uttar Pradesh State Sugar Corporation Limited's sugar mills for the previous crushing season 2007-08, in view of the disinvestment of the state's shares in the Corporation. The Governor has also authorized you to immediately withdraw this amount from the government fund as per the procedure outlined in Paragraph 209 of Financial Code No. 1 and make it available to Uttar Pradesh State Sugar Corporation Limited for the payment of outstanding cane prices for their sugar mills.

The above-mentioned amount will be spent solely for the purpose for which it has been approved. The certificate of utilization for the expenditure will be submitted to the government as soon as possible.

The expenditure in the current financial year (2008-09) will be covered under Grant Number 24 for income and expenditure, with the following details: 2852 Industry 08 Consumers, Industry 201 Sugar 10 Uttar Pradesh State Sugar Corporation Limited for privatization/sale -01, cane price payment 20, auxiliary grants/contributions will be made in the name of the state.

This order is being issued with the approval obtained from the Finance Department's unofficial number B-4-147/Das-2008, dated .............

9.2. The Assessing Officer relying upon the decision of Sahney Steel & Press Works Ltd. vs CIT [1997] 228 ITR 253 (SC) submitted that the issue in this case was fully covered against the assessee, where, it has been held that subsidies not having been granted for production of or bringing into existence any new asset are of revenue character. Further, the ld. CIT-DR submitted that the Hon'ble Supreme Court in the case of CIT v. Ponni Sugars & Chemicals Ltd. (supra) referred to its earlier decision in the case of Sahney Steel and Press Works Ltd. (supra) and held that nature of the subsidy is to be determined with reference to the purpose for which such subsidy is given (i.e. the 'purpose test). It is further submitted that factors such as the source/form of the subsidy, time of payment of the subsidy are not relevant. The Ld. CIT (DR) submitted that based on analysis of facts of the case, the Hon’ble Supreme Court held that as subsidy must be utilised for repayment of loans taken by sugar factories for setting up of new units or for substantial expansion of existing units, such subsidy would be of capital nature. The Ld DR pointed out that the Hon’ble Supreme Court held that if the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account and on the other hand, if the object of the assistance in the subsidy scheme was to enable to assessee to set up a new unit or expand the existing unit then the receipt of the subsidy was on capital account. Accordingly, the Ld CIT (DR) submitted that it is the object for which the subsidy/assistance is given, which determines character of the incentive or subsidies and form or the mechanism through which the subsidy is given is irrelevant.

9.3 Therefore, we find that the ld. CIT-DR submits that it is the purpose for which the subsidy/assistance is given in the hands of the assessee and not the purpose of the said grant by the Government of Uttar Pradesh that will determine the character of the incentives or the subsidies and its taxability in the hands of the assessee. In this case, on perusal of the letter dated 16.09.2008 of the UP Government as referred above, it is seen that the Hon'ble Governor had approved the expenditure of Rs. 246,00,00,000 (Two hundred forty-six crores only) for the payment of the outstanding cane price for the Uttar Pradesh State Sugar Corporation Limited's sugar mills for the previous crushing season 2007-08, in view of the disinvestment of the state's shares in the Corporation. Further, vide this letter, the assessee was also authorized to immediately withdraw this amount from the government fund as per the procedure outlined in Paragraph 209 of Financial Code No. 1 and make it available to Uttar Pradesh State Sugar Corporation Limited for the payment of outstanding cane prices for their sugar mills. Further, vide letter dated 04.11.2011 of the UP State Sugar Development Corporation (placed at page no.37 of the paper book) a sum of Rs.17,44,85,000/- out of the sum of Rs.246,00,00,000/- was allotted to the assessee company for the payment of the outstanding arrears of the cane growers.

9.4. Therefore, the intent/purpose of the said grant by the U.P.

Government was clearly to protect the intrinsic value of the share capital (before the sale of these shares or the disinvestment of the shares as the case may be of the assessee company in which the 100% shares were held by the UP State Government) that it held on 100% basis in the assessee company and therefore the intent or the object of the said grant was capital in nature and not revenue in nature. Even though, it helped the assessee in repaying the outstanding arrears of the cane growers, which was the liability of the assessee and to that extent, it got a benefit, but the said benefit was not main purpose of the grant by the Government of Uttar Pradesh as it was sanctioned by the Hon'ble Governor for the payment of the outstanding cane price for the Uttar Pradesh State Sugar Corporation Limited's sugar mills for the previous crushing season 2007-08, in view of the sales/disinvestment of the state's shares in the Corporation.

9.5. Further, in this case, the amount sanctioned to the assessee is by way of a grant and not as a subsidy under any subsidy scheme approved/sanctioned by the Government of Uttar Pradesh. Therefore, as discussed above, this grant is for a specific purpose in the hands of the assessee to pay the outstanding arrears of the cane growers and if the Department’s view is accepted that either it is a revenue receipt or it is a benefit to the assessee to recoup the expenses towards purchase of cane from the cane growers allowed as deduction in earlier years will be taxable during the year in the given facts of the case will negate/defeat the very purpose of the grant for which the grant was sanctioned i.e. for the payment of outstanding arrears of the cane-growers, whose cash flow, generally speaking is under stress.

9.6. Now, coming to the submission of the Department that it is the utilisation in the hands of the assessee that will determine its taxability, the facts in the present case are more similar to the facts of the case in PCIT Vs State Fisheries Development Corporation Ltd. (2019) 414 ITR 443 (Cal)

Hon'ble Calcutta High Court wherein, it was held that where a significant portion of the grant was used to pay salaries and provident funds, which are in the nature of revenue expenses, the grant so stated remained capital. The SLP filed by the Department was dismissed by the Hon’ble Apex Court in the case of PCIT Vs State Fisheries Development Corporation Ltd. [2019] 102 taxmann.com 221(SC) and the relevant findings have already been reproduced in the assessee’s submission dated 27.03.2025 in para no.6 on pages no.13 and 14 of this order. The question of the Revenue admitted by the Hon’ble Calcutta High Court and the relevant extract of the decision in not holding the grants in aid from the State Government to the assessee company as revenue receipt in para 12 to 14 of the order is reproduced as under:-

"Whether the amount of Rs. 4,60,00,000 received in the assessment year 2006-07 by the assessee from the State Government in the form of grant-in-aid ought to be treated as revenue receipt, on the basis of application of funds so received, which was utilized for clearing salary, provident fund dues and flood relief ?"

As we find from these authorities, distinction has been made between the broad principles for dealing with grant-in-aid as laid down in the case of Sahney Steel and Press Works Ltd. (supra) and money extended for assistance to subsidiaries by the parent company on stand-alone basis, not as a part of any general scheme. In the case of the assessee, though it is not a grant from a parent company to a subsidiary company, the grant is from the State Government, which was in effect, hundred per cent. shareholder of the assessee. Rs.3,60,00,000 was meant for payment of staff salaries and provident fund dues. As we have already observed, these item heads may bear the label of revenue receipt on the surface, it is apparent that the actual intention of the State was to keep the company, facing acute cash crunch, floating and protecting employment in a public sector organization. There is no separate business consideration on record between the grantor, that is the State Government and the recipient thereof being the assessee. The principle of law as laid down in the case of Siemens Public Communication Network P. Ltd. (supra) is that voluntary payments made by the parent company to its loss making Indian subsidiary can also be understood to be payments made in order to protect the capital investment of the assessee-company. Though the grant-in-aid in this case was received from public funds, the State Government being a 100 per cent. share-holder, in our opinion, its position would be similar to that of, or at par with a parent company making voluntary payments to its loss making undertaking. No other specific business consideration on the part of the State has been demonstrated before us in this appeal. The assistance extended appears to us to be measures to keep the assessee- company floating the assessee being, for all practical purposes an extended arm of the State. Though large part of the funds were applied for salary and provident fund dues, the object of extension of assistance, it was argued before us, to ensure survival of the company. As regards the funds extended for flood relief, the same cannot constitute revenue receipt. Flood relief does not constitute part of business of the assessee. We accordingly answer the question in favour of the assessee and confirm the finding of the Tribunal. The appeal is dismissed.” 9.7. Therefore, even if the utilization of the funds is for revenue expenditure purposes, as in the case of the assessee by utilizing the funds for payment of outstanding dues of the cane growers which was a revenue expenditure, but keeping in view the facts and decision in the above cited case, this amount will not be a revenue receipt in the hands of the assessee company.

9.8. Therefore, in view of the above discussion and respectfully relying upon the above cited decision, we are of the considered view that the grant of Rs.17,44,85,000/- to the assessee company is held to be not as a revenue receipt and therefore not taxable.

10. As regards the action of AO in taxing the said amount under section 41 of the act the relevant extract of the assessee submission before the Ld CIT (A) is reproduced under :

“The AO has added this amount to the total income of the assessee company /s 41(1) of the Act treating the same as remission and cessation of the trading liability. Now we quote sec. 41- Where an allowance or deduction has been made in the assessment of any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first mentioned person) and subsequently during any previous year-

The first mentioned person has obtained whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income tax as the income of. that previous year…. Now the following question arises - What is the meaning of remission and cessations' as mentioned in the sec. What is the meaning of 'benefit obtained' mentioned in the section Whether the amount received from shareholder to pay the trading liability constitute remission or cessation of liability or whether it will be termed as taking any benefit in respect of such liability. Meaning of remission or cessation and benefit obtained - Remission or cessation of liability could be obtained as under- If the assessee does not pay the amount to its creditors and writes backs to its profit and loss account If the creditors settles its claim at nil amount or at less amount If the assessee obtained benefit from its creditors or its lenders or obtained tax concessions which were earlier imposed upon him in respect of such liability which has been already deducted from the profits in earlier years. Here the assessee has not obtained any remission or cessations from its creditors nor the assessee has obtained any benefits from its creditors in respect of such liability. The amount of Rs.1744.85 lacs was received by the assessee from its shareholder which is state of UP when a shareholder provides the money to his company for payment to the creditors of the company, how it can be treated as remission or cessations of liability. It is the duty of the shareholder to provide the money to his company to clear the dues. It particularly happens in the govt. companies. It does not matter in what forms the money comes from the govt. It also does not matter what the treatment is done by the recipient. Remission and cessations could be done either by not paying to its creditors or paying the lower amount and subsequently writing off the amount to its profit and loss account. In this case it has not happened. All the trading liabilities have been paid in full. The assessee company has not obtained any benefit in paying its trading liabilities. Amount provided by shareholder for payment of trading liabilities cannot be termed as remission and cessation of liability.”

10.1. The question in the case of assessee as to whether there is any remission or cessation of liability of the assessee amounting to Rs.17,44,85,000 towards the outstanding dues of the cane growers or not, the answer is categorical ‘No’ because the grant of Rs.17,44,85,000 received by the assessee was paid in entirety towards the outstanding arrears of the cane growers as directed in the letter dated 16.07.2008 granting the said amount to the assessee company. In fact, the assessee is only a pass through entity in the given facts of the case which the Government of Uttar Pradesh had granted for the payment of outstanding cane prices of the cane growers. In fact, in this case the government itself decided the object/purpose of the grant Rs.17,44,85,000 and the mandate for its utilization. The explanation of the assessee company that the amount of Rs.1744.85 lacs received by the assessee from its shareholder which is state of UP and when a shareholder provides the money to his company for payment to the creditors of the company, it cannot be treated as remission or cessations of liability is acceptable. Further in the case of of Rollationers Ltd. vs. CIT (supra) relied by the Assessing Officer, there was a part waiver of debts by the financial institutions, whereas, no such waiver has taken place in the case of the assessee company. Therefore, we are of the considered view that this amount is not taxable under section 41(1) of the Act also.

11. Therefore, in view above facts and discussion we are of considered view that the action of the AO in treating the amount of Rs.17,44,85,000 as revenue receipt and or remission/cessation of liability being taxable under section 41(1) of the act and confirmed by the Ld CIT (A) in not sustainable and the same is deleted. Ground no.1 to 3 of the appeal is allowed.

Order pronounced in the open court on 1st July, 2025.