THE COMMISSIONER OF INCOME TAX vs. M/S.INDIA TELEPHONE INDUSTRIES LTD

3 29.10.1991. The Commissioner of Income-Tax invoked the jurisdiction under Section 263 of the Income-Tax Act, 1961(for short hereinabove referred as “the Act” for short) proposing to tax a sum of `37,67,365/- grant-in-aid received from the Government and a sum of `38,02,801/- further grand-in-aid among other item to tax. The Commissioner partly allowed the revision and levied tax under Section 41 of the Act on the grant-in-aid received. Aggrieved by the same, the assessee preferred appeal to the Tribunal. The Tribunal following its earlier order reversed the said order by holding that the said amount is not liable to tax under the Act. Aggrieved by the said order, the present appeal is filed.

The substantial question of law that arises for our consideration in this appeal is as under:- “Whether the Tribunal was correct in holding that the grant-in-aid of

4 `38,02,801/- received by the assessee from the Government of India should be treated as ‘capital receipt’ and cannot be treated as ‘revenue receipt’?”

The Revisional authority held that the amount was received as grant-in-aid from the Government and the relevant expenditure relating to grant-in-aid was debited to the profit and loss account and was allowed as expenditure in the assessment. The assessee in their account treated the grant-in-aid of `38,02,801/- as revenue account. Normally, such receipt is in the nature of income or it has to be brought to tax under Section 41 of the Act. In the instant case, as the assessee himself has categorized the grant of `38,02,801/- as revenue and it was spent on assessee’s expenditure on scientific research including their revenue expenditure, he directed the assessing officer to bring to tax the revenue grant-in- aid of `38,02,801/-. Dealing with this reasoning, the

5 Tribunal pointed out the facts set out therein are factually incorrect. The audit report attached with the return of income specifically mentions that the revenue expenditure in respect of scientific research of `13,06,84,081/- does not include expenditure out of grant-in-aid from Government of India. The reasoning for invoking the provision of Section 263 was assumed on wrong assumption of facts. It is not found from the record that the grant-in-aid is in respect of trading activities carried on by the assessee. The grant is specifically for carrying out certain research and the Government of India is the ultimate owner of any asset acquired out of such research carried on by the assessee. Therefore, the grant-in-aid cannot be considered as revenue receipt, but is to be treated as capital receipt not liable to tax. In this context, it is necessary to notice the judgment of the Apex Court in the case of Commissioner of Income-Tax Vs. Ponni Sugars & Chemicals Ltd.,

6 and others reported in (2008) 306 ITR 392, where they were dealing with the question whether the incentive subsidy received by the assessee is capital receipt not includible in the total income. After referring to the various provisions of the scheme, under which said subsidy was given, it was held as under:- “The context is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time on which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main liability condition that the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loan taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object to the subsidy claim was to enable the assessee to run the business more profitably,

7 then the receipt is on the revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit, then the receipt of the subsidy was on capital account. Therefore, it is the object for the subsidy/assistance is given to be determined. The nature of the incentive subsidy, form or the mechanism to which the subsidy is given is irrelevant.”

It is in the back ground of the aforementioned judgment when we look to the facts of this case, it is clear that the object of the grant-in-aid is for the specific purpose of conducting research in the field of telecommunications, so that the benefit thereof would enure to the Nation. May be on account of said research, the assessee is able to manufacture a better or more sophisticated product, they may be able to earn more. But the object with which this grant-in-aid is given to the assessee is for conducting research and improving existing telecommunication systems. In

8 other words, the grant-in-aid is not given to the assessee for carrying on its day-to-day business. Infact, if after research if the assessee is able to acquire new ideas or new knowledge and use the same in its manufacturing activity, it would be a case of acquisition of such new idea which in itself would constitute an intellectual property. It is to acquire such capital asset, the grant-in-aid is given. It also helps in the growth of the assessee generally in public interest, as the said grant-in-aid is given to the assessee, so as to assist the assessee to acquire the new capital asset and the said benefit may be incidental to the business of the assessee. It is in the nature of capital asset. Once it is to be held as capital asset, even if in the records maintained by the assessee, they show as revenue expenditure, it would not make any difference in law, as the liability to tax is depending on the object with which the grant-in-aid is given to the assessee. In that view of the matter, in

9 the facts of this case, when the grant-in-aid is given to the assessee for research in the field of telecommunications, which in-turn would benefit the Nation and public at large, the said income is only a ‘capital receipt’ and not a ‘revenue receipt’ as contended by the revenue. In that view of the matter, we do not find any merit in this appeal. The substantial question of law is answered in favour of the assessee and against the revenue.

Accordingly, appeal is dismissed.

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JUDGE

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JUDGE

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